Reply #28: Tread Carefully With New Treasury ETFs

[54anickel]

http://www.thestreet.com/funds/etftuesday/10306942.html

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Ameristock's new bond ETFs will be more of a benefit to people who trade actively, or to institutional managers, who now will have a fast and easy way to more narrowly manage duration, make short-term directional bets on interest rates, and quickly reallocate the makeup of their bond portfolios.

Unfortunately, these funds may not be right for do-it-yourself investors looking for steady income.

According to the Ameristock prospectus , the bonds (or notes) owned in each fund will be from the most recent auction for that maturity -- sort of. Each of the funds will blend together maturities, and possibly futures contracts, to "create" the yield associated with the targeted maturity for each given ETF.

The downside of this strategy is that investors are not locking in what might be a favorable yield.

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In late June, five-year Treasury notes yielded 5.15% to 5.20%. The investor who bought a five-year Treasury bond in June would get that 5.15% until maturity. But the investor who bought the five-year ETF, had it existed in June, would now be facing a much lower yield. Though there's always the chance the reverse situation will happen, giving the ETF a higher yield, an investor counting on a particular income stream will face perpetual uncertainty with these funds.

In addition, the new ETFs will pay a dividend only once a year, which is rather quirky. Specifically, the wording in the prospectus reads: "Each fund pays out dividends to investors at least annually and may pay them on a more frequent basis."

more...

Looks like those meetings between Treasury and Wall Street have devised a way to cover the days when no one shows up at the auction. :eyes: