These Funds Hold Just 1 Bond. Why They’re Revolutionary.

Since bonds don’t trade on exchanges, investors need to trade through one of the broker-dealers over the counter.


Al Drago/Bloomberg

Investors may still be scratching their heads about recent launches of single-stock funds. The fixed-income market is also embracing a new kind of product that could potentially revolutionize how people trade U.S. Treasury bonds and bet on interest rates.

This week, F/m Investments, a $4 billion boutique investment advisor, launched the



US Treasury 10 Yea

r exchange-traded fund (UTEN),



US Treasury 2 Year ETF

(UTWO), and



US Treasury 3 Month Bill ETF

(TBIL). The three new funds each hold only the most current—or the so-called “on the run”—issue of the benchmark 10-year, two-year, and three-month Treasury notes, respectively. The holding will be automatically rolled over to the next current bond when it’s issued.   

These single-bond funds might look very simple, but they could be of tremendous help to many investors. Directly trading bonds has been a pain for investors who might lack the proper knowledge or connection. Since bonds don’t trade on exchanges, investors need to trade through one of the broker-dealers over the counter. That often means less transparency and worse liquidity. 

Investors could also purchase options and futures tied to particular bonds. But doing so requires a margin account and exposes them to additional risks, such as the spread between cash bonds and futures, and the cost of rolling over those contracts.

While bond funds—whether actively managed mutual funds or index-tracking ETFs—have been around for years, they often hold dozens, if not hundreds and thousands, of securities at the same time. 

One of the most widely held bond ETFs, the



iShares Core U.S. Aggregate Bond ETF

(AGG), for example, aims to track the entire U.S. investment-grade bond market and has more than 10,000 holdings. A more narrowly defined one, the



iShares 7-10 Year Treasury Bond ETF

(IEF), owns 12 issues of Treasury bonds with remaining maturities between seven and 10 years.

These multi-issue bond funds allow investors to easily diversify their portfolios. But as new bonds fitting their criteria are issued and old ones are retired, their holdings and risk characteristics—such as maturity and coupon—are constantly changing. 

For many investors, such fluctuations—if not dramatic—might not be a big problem. But this could be a dealbreaker for those that want absolute control over their bond exposure, like traders who bet on interest rates’ day-to-day movements.

“There are a lot of great Treasury products out there, but they either represent an active view from the fund managers, or, in case of the passive ETFs, leave it up to how the Treasury Department issues bonds to cover its spending,” says F/m President Alexander Morris. “This [new fund] gives you very precise control over your spot on the yield curve,” he explains, “You will have a consistent maturity all the time, without any of the roll expense.” 

Traded on exchanges with real-time pricing, the single-bond Treasury ETFs provide investors nearly universal access to the benchmark government bonds, as well as the ability to bet on or against the yield curve without using options. “You can buy a 10-year ETF and short a two-year ETF,” says Morris, “You create a bet on the yield spread right there.” 

There are many other benefits that come with the ETF wrapper as well: Tax efficiency, intraday liquidity, and the ability to transact in fractions of traditional bond sizing. Investors will also receive income more frequently than directly holding the bonds. Instead of the coupon interest that usually comes semiannually, the ETF will pay a monthly dividend. 

The price point of these single-bond Treasury ETFs is also reasonable. The three new funds charge a fee of just 0.15%, largely in line with other broadly diversified bond ETFs. Three days into trading, the three new funds have nearly $43 million in assets combined. Jane Street, Mirae Asset Securities, and several other investment firms have committed initial funding for the products.

The launch of single-bond Treasury ETFs is likely just the start of a revolution coming to the bond-fund market. Current products on the market usually offer very broad aggregates: Funds that seek certain credit ratings typically aren’t sliced by sectors, while those focused on particular sectors come with a hodgepodge of ratings. That might no longer meet investor demand, which is getting increasingly specific.

Fund companies will likely start to offer much more targeted exposures to the bond world—not only to Treasuries, but also other groups like corporate and municipal bonds, says Morris: “2023 and 2024 are probably gonna be marked by a large number of fixed-income ETFs making the space much more accessible.”

Write to Evie Liu at evie.liu@barrons.com

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