Sharpening Our Fixed Income ETF Tools

The annual Jackson Hole meeting is upon us. And there’s nothing more sensitive to central banker narratives than the bond market.

Going into the meeting this year we have bonds delivering their worst performance on record in any given year if you consider the AGG as an ETF proxy. Investment grade bonds are down 10% so far in 2022, dropping as U.S. stocks drop too. Investors everywhere will be tuned in to what happens in Wyoming later this week.

Maybe it’s the high correlations across assets that makes it feel like there’s a lot hanging in the balance this time around, or maybe it’s just been a rough year for markets domestically and globally, so every Fed move counts. Maybe it’s recession fears, or bad news burnout. But the fact is that markets price expectations, and crystal balls everywhere seem especially murky this year when it comes to predicting what happens next.

But here’s the good news. If you are an equity ETF investor, you have long been able to invest tactically with high precision. From sectors to factors to themes, equity ETFs have consistently innovated over the years, and today are abundant in flavor and sharper in focus. You can position for the long-term – or for a specific event such as Jackson Hole in the very near term – exactly as you want with ETF tools today.

Fixed income ETF investors, however, haven’t had that privilege. But that’s finally changing. Thanks to some really interesting innovation in the fixed income ETF space, bond investors can now start to really fine tune their exposure, not just in credit but in sovereign debt.

The recent launch of the US Benchmark Series of single Treasury ETFs by F/m Investments offers ETF investors incredibly targeted exposure to the Treasury yield curve. Each of the funds – UTEN, UTWO and TBIL – offer access to a single “on-the-run” Treasury bond, each a 10Yr, 2Yr and 3-month, respectively.

We saw the advent of single stock ETFs earlier this year, and now we welcome the single bond funds. In truth, we first saw BondBloxx break new ground in this space with the lineup of sector-specific high yield bond ETFs, but now we see product innovation that brings specificity to Treasuries.

This is all about high precision positioning across the yield curve. It’s about duration risk management. It’s about investors getting tactical and intentional on their Treasury exposure through ETFs. The key value proposition of these newly minted single Treasury ETFs is to allow investors to manage overall exposure to duration without having to give up on any core bond allocation.

It’s safe to assume that advisors will probably like the ability to sharpen their duration risk without having to sell existing fixed income positions. Market makers will probably love to trade these funds, which should be abundantly liquid. And the options market is already picking up for these new strategies, opening the door to all sorts of interesting plays.

It’s not often we see first-of-a-kind ETF innovation 30 years after the launch of the first U.S.-listed ETF, SPY. But as ETF Nerds, we sure get excited every time we do. And it seems particularly fitting that disruption in fixed income ETF investing would come in a year like 2022 when bond investors are looking for all of the help they can get.


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