A new group of ETFs is bringing the stodgy Treasury market even closer to the stock market and giving some investors a way to make targeted bets on the yield curve. F/m Investments launched a series of ETFs last week focused on individual maturities for U.S. government debt, giving investors the ability to easily gain exposure to specific segments of the Treasury market. The funds have a relatively simple structure. They purchase and hold Treasurys of the stated maturities until they become outdated. Then, F/m goes to a brokerage to swap out the older bonds for more current issues, keeping the exposure close to the stated objective. “There were lots of more sophisticated, perhaps more interesting or academically engaging ways to provide this exposure,” said Alex Morris, president and chief investment officer of F/m. “But it turns out that wasn’t exactly what folks were looking for. …They wanted a simpler, tidier, easier-to-understand, easy-to-trade way to get access to this consistent maturity, safe investment.” F/m hopes that, by avoiding using options or swaps in the fund and instead gaining direct exposure to the cash bonds, the funds will be less of a target for high frequency traders who may try to game the funds, Morris said. For now, the funds are only buying on-the-run Treasuries, but they may participate in the when-issued market as the assets in the funds increase, Morris said. The focus on single time-frames differs from existing Treasury ETFs. For example, the popular iShares series of Treasury funds takes a wider scope, such as a 1-3 year Treasury fund (SHY) and 20+ year Treasury fund (TLT) . The lack of specificity in fixed income ETFs stands in contrast to equity ETFs, which have boomed over the past decade with increasingly customized strategies. “The environment that we were in the last 12, 14 years really didn’t call for Treasuries to be interesting. And if you think about it, over the past 12-14 years is when the ETF space has gone through a tremendous amount of growth,” said Craig Urcioli of The RBB Fund, which advises F/m. The first batch of the Treasury funds from F/m includes a three-month bill fund (TBIL) , a 2-year Treasury fund (UTWO ) and 10-year Treasury fund (UTEN) . Morris said the plan is to fill out the yield curve over the next several months. The funds have an expense ratio of 0.15% and will also pay out dividends on a monthly basis, regardless of when the underlying bills, notes and bonds receive coupon payments. In cases where the value of the bonds has risen before a rolling period, creating a potential capital gain, F/m will use a so-called “heartbeat trade” that keeps the event from being taxable, Morris said. While the simplicity and convenience of the ETF structure is a main selling point for the fund, the ability to make easy bets on the shape of the Treasury curve will be another draw for some investors, Morris said. “There’s a lot of closeted curve nerds out there,” Morris said.
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