{"id":2838,"date":"2022-01-31T23:46:17","date_gmt":"2022-01-31T23:46:17","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=2838"},"modified":"2022-01-31T23:46:17","modified_gmt":"2022-01-31T23:46:17","slug":"indexed-bond-etfs-to-gain-assets-and-liquidity","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/indexed-bond-etfs-to-gain-assets-and-liquidity\/","title":{"rendered":"Indexed Bond ETFs to Gain Assets and Liquidity"},"content":{"rendered":"

Lost in all the market volatility and concerns about interest rate hikes and inflation was a regulatory ruling with major implications for asset capture in the ETF industry<\/strong>. The New York State Department of Financial Services is the state’s insurance regulator.\u00a0 In December it published a new regulation that, until Jan. 1, 2027, allows shares of an ETF to be treated as bonds for the purpose of a domestic insurer’s risk-based capital report provided the ETF meets certain criteria. The two most pertinent criteria are that the ETF tracks a bond index and has at least $1 billion in assets under management. <\/span>Why is this so important?\u00a0 At the end of 2019, the US Insurance industry reported holding more than $4.5 trillion in bonds.\u00a0\u00a0<\/span><\/p>\n

“This puts bond ETFs on a level playing field with bonds in an insurer’s portfolio,” said Robert S, Kapito, President of BlackRock, on Jan. 14 during the company’s earnings call for the fourth quarter 2021.\u00a0 He added that BlackRock is “very excited about the fact that insurers now will use more ETFs to represent their bond portfolio.”\u00a0 BlackRock is the sponsor of iShares.<\/span><\/p>\n

All of the approximately 5,000 stocks, 16 sector groups, 140 industries, and 500 ETFs have been updated on\u00a0www.ValuEngine.com<\/a><\/strong><\/h5>\n
Free Two Week Trial to all 5,000 plus equities and ETFs covered by ValuEngine\u00a0HERE<\/a><\/strong><\/h5>\n

The difference between treating a holding as debt rather than equity for risk-based capital requirement purposes “is orders of magnitude,” said attorney Daniel A. Rabinowitz, a partner at the law firm Kramer Levin Naftalis & Frankel. He states that “You have to hold much, much more capital against equity securities.”<\/span><\/p>\n

Among criteria an ETF must meet to qualify under the new regulation are that the fund tracks a bond index and has at least $1 billion in assets under management. A quick top-level analysis of the current array of bond ETFs offered in the US provides key insights.\u00a0 The bottom line is that iShares and Vanguard will probably be the largest beneficiaries of the new rules.\u00a0 A closer look reveals why.\u00a0<\/span><\/p>\n

There are 97 Bond ETFs that currently satisfy those two criteria.\u00a0 The lion\u2019s share of the assets are accounted for by the top 25.\u00a0 Those ETFs have between $10 billion and $91 billion in AUM.\u00a0 The remaining 72 have less than $10 billion apiece. Of these, there are another 20 Bond ETFs with between $5 and $10 billion.\u00a0 Two index providers, Bloomberg and ICE Data Services, are dominant in AUM and number of products.<\/span><\/p>\n

Taking a deeper dive, 17 of the largest 25 ETFs are iShares.\u00a0 Six are Vanguard products with one apiece issued by Schwab and SPDRs.\u00a0 It surprised me that four of the top 5 in AUM were Vanguard ETFs.\u00a0 It also surprised me that very close to half (47.3%) of the total AUM in the top 10 were in those Vanguard products.\u00a0 Here is a table from an ETF.com screen showing the top ten ETFs of the 97 that would qualify today under the new NY State Insurance rule reducing capital requirements.<\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Ticker<\/b><\/td>\nName<\/b><\/td>\nIssuer<\/b><\/td>\nExpense Ratio<\/b><\/td>\nAUM (Billions)<\/b><\/td>\nDescription<\/b><\/td>\n<\/tr>\n
AGG<\/span><\/td>\niShares Core U.S. Aggregate Bond ETF<\/span><\/td>\nBlackrock<\/span><\/td>\n0.04%<\/span><\/td>\n$89.65\u00a0<\/span><\/td>\nFixed Income: U.S. – Broad Market, Broad-based Investment Grade<\/span><\/td>\n<\/tr>\n
BND<\/span><\/td>\nVanguard Total Bond Market ETF<\/span><\/td>\nVanguard<\/span><\/td>\n0.04%<\/span><\/td>\n$82.94\u00a0<\/span><\/td>\nFixed Income: U.S. – Broad Market, Broad-based Investment Grade<\/span><\/td>\n<\/tr>\n
VCIT<\/span><\/td>\nVanguard Intermediate-Term Corporate Bond ETF<\/span><\/td>\nVanguard<\/span><\/td>\n0.04%<\/span><\/td>\n$45.75\u00a0<\/span><\/td>\nFixed Income: U.S. – Corporate, Broad-based Investment Grade Intermediate<\/span><\/td>\n<\/tr>\n
BSV<\/span><\/td>\nVanguard Short-Term Bond ETF<\/span><\/td>\nVanguard<\/span><\/td>\n0.05%<\/span><\/td>\n$41.42\u00a0<\/span><\/td>\nFixed Income: U.S. – Broad Market, Broad-based Investment Grade Short-Term<\/span><\/td>\n<\/tr>\n
VCSH<\/span><\/td>\nVanguard Short-Term Corporate Bond ETF<\/span><\/td>\nVanguard<\/span><\/td>\n0.04%<\/span><\/td>\n$41.19\u00a0<\/span><\/td>\nFixed Income: U.S. – Corporate, Broad-based Investment Grade Short-Term<\/span><\/td>\n<\/tr>\n
TIP<\/span><\/td>\niShares TIPS Bond ETF<\/span><\/td>\nBlackrock<\/span><\/td>\n0.19%<\/span><\/td>\n$36.86\u00a0<\/span><\/td>\nFixed Income: U.S. – Government, Inflation-linked Investment Grade<\/span><\/td>\n<\/tr>\n
LQD<\/span><\/td>\niShares iBoxx USD Investment Grade Corporate Bond ETF<\/span><\/td>\nBlackrock<\/span><\/td>\n0.14%<\/span><\/td>\n$36.57\u00a0<\/span><\/td>\nFixed Income: U.S. – Corporate, Broad-based Investment Grade<\/span><\/td>\n<\/tr>\n
MUB<\/span><\/td>\niShares National Muni Bond ETF<\/span><\/td>\nBlackrock<\/span><\/td>\n0.07%<\/span><\/td>\n$24.55\u00a0<\/span><\/td>\nFixed Income: U.S. – Government, Local Authority\/Municipal Investment Grade<\/span><\/td>\n<\/tr>\n
MBB<\/span><\/td>\niShares MBS ETF<\/span><\/td>\nBlackrock<\/span><\/td>\n0.04%<\/span><\/td>\n$24.47\u00a0<\/span><\/td>\nFixed Income: U.S. – Government, Mortgage-backed Investment Grade<\/span><\/td>\n<\/tr>\n
IGSB<\/span><\/td>\niShares 1-5 Year Investment Grade Corporate Bond ETF<\/span><\/td>\nBlackrock<\/span><\/td>\n0.06%<\/span><\/td>\n$23.06\u00a0<\/span><\/td>\nFixed Income: U.S. – Corporate, Broad-based Investment Grade Short-Term<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
Current ValuEngine reports on these ETF\u2019s can be viewed\u00a0HERE<\/a><\/strong><\/h5>\n

Summarizing some salient points from this table:<\/span><\/p>\n

    \n
  1. The top 10 indexed bond ETFs account for $446.5 billion or about 37% of the $1.2 trillion currently in bond ETFs.\u00a0\u00a0<\/span><\/li>\n
  2. The two largest bond funds, one from iShares and the other from Vanguard, follow very similar total US bond market indexes and are almost identical in AUM <\/span>Together,<\/span> they comprise about $170 billion.<\/span><\/li>\n
  3. All of the Vanguard bond ETFs have iShares counterparts with only AGG being larger than the Vanguard entry.<\/span><\/li>\n<\/ol>\n

    In assessing what all this will mean for the exchanged-traded ecosystem requires two data points I do not have:<\/span><\/p>\n