Default Risk Factor

Barclays to Launch Fixed-Income ETFs in July

Default Risk Factor

San Francisco-based Barclays Global Investors today announced that four iShares tied to bond indexes will begin trading on the American Stock Exchange on July 26. The fixed-income ETFs, the first to trade in the U.S., will be linked to the Lehman 1-3 Year Treasury Bond, Lehman 7-10 Year Treasury Bond, Lehman 20 Year Treasury Bond, and the Goldman Sachs Corporate Bond indexes.

All of the funds will have an expense ratio of 0.15% according to the prospectus, which puts them on par with the Admiral Shares of Vanguard's bond index funds. The Admiral Share class (available to large or long-standing accounts) of Vanguard's short- and intermediate-term bond index funds have expense ratios of 0.17%.

Since bonds historically return less than equities, expenses can have a significant impact on returns over time.

"The fact is that the range of potential returns of bond funds is narrower than the range of potential returns of stock funds," said Lee Kranefuss, CEO of BGI's Individual Investor Business, in a statement. "By providing low expense ratios, investors in iShares bond ETFs will have more capital working for them."

However, bond ETFs may not offer the same tax efficiency benefits as existing ETFs hitched to equity indexes.

"The only tax advantages ETFs have over regular mutual funds are with regard to cap gains, which tend to be extremely small with bond funds," said Morningstar analyst Christopher Traulsen. "The bond ETFs will generate income just like regular bond funds, and that income will be taxed at the same rate the income for a bond mutual fund would be, i.e., your personal income-tax rate."

BGI said three more fixed-income ETFs - the iShares Lehman Treasury Bond Fund, iShares Lehman Government/Credit Bond Fund, and the iShares Lehman Credit Bond Fund - will be launched at a later date.