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New ETF Advisers Fixed-Income ETFs Begin Trading

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Four new U.S. Treasury exchange-traded funds began trading today on the American Stock Exchange. The new funds, introduced by ETF Advisers, track Treasury securities with one, two, five and 10-year maturities. Called "fighters" - Fixed Income Trust Receipts or FITRS - at least 95% of the underlying assets of the new funds are debt obligations of the U.S. Treasury or Federal agencies, according to ETF Advisers.

The new funds are: Treasury 1 FITR (TFT), Treasury 2 FITR (TOU), Treasury 5 FITR (TFI), and Treasury 10 FITR (TTE).

"We've designed each Treasury FITR portfolio to match the performance, before fees and expenses, of a consistent-maturity Ryan Treasury Index which allows investors to stay at the same point on the yield curve without having to adjust their own portfolios," said Gary Gastineau, managing director of ETF Advisers and interview guest earlier this year.

"For equity and balanced investors, U.S. Treasury securities offer effective diversification when it's most important, during times of extreme financial uncertainty," said Gastineau in a statement. "When stock prices are falling sharply, Treasury prices usually 'decouple' from the equity market and rise as investors seek safety and liquidity."

The new FITRS will be up against Barclays Global Investors' fixed-income iShares ETFs, which were launched in July. In terms of costs, the funds stack up evenly with razor-thin expense ratios of 0.15%. For comparison, Vanguard's short-, intermediate-, and long-term bond index funds have expense ratios of 0.21% (the short-term and intermediate-term funds have Admiral Shares at 0.17%). Cost is perhaps even more crucial in bond fund investing because the returns are historically lower than equities. However, ETFs carry broker commissions because they are traded like stocks, so mutual funds may be cheaper for investors who dollar cost average using small amounts.

Morningstar fund analyst Christopher Traulsen pointed out the tax advantages enjoyed by equity ETFs may not be as relevant for bond funds.

"With stock funds, ETFs' advantage in this area stems from their ability to limit realized capital gains in some instances," wrote Traulsen in a June article (see link below - the article details the differences between the iShares and the FITRs). "But government bond funds, including FITRs, generate income streams that are subject to federal income tax (they are exempt from state tax), and the ETF structure provides no means of limiting this tax."


"Barclays to Get Competition in Bond Indexes." Christopher Traulsen, Morningstar senior analyst, 06/07/2002.