Single-Security ETFs Begin Their North American Tour
By: Andres Rincon
September 7, 2022 - 2 Minutes 30 Seconds
The U.S. investment community was recently introduced to a new type of equity ETF. Although ETFs are known for diversification benefits, they are also a wrapper for single securities. While day traders are celebrating these products, regulators remain cautious as long-term market implications are unclear. Recently, single-bond ETFs were listed on the heels of single-equity ETFs, stimulating further ETF product discussions.
We highlighted these ETF products in Are Single-Stock ETFs the Next, Big Trend? Unlike single-equity ETFs, single-security fixed-income ETFs are not leveraged. The jury is still out on whether this will become a gamechanger for fixed-income investors. Below, we detail the wide uses and nuances of single-bond ETFs.
We highlighted these ETF products in Are Single-Stock ETFs the Next, Big Trend? Unlike single-equity ETFs, single-security fixed-income ETFs are not leveraged. The jury is still out on whether this will become a gamechanger for fixed-income investors. Below, we detail the wide uses and nuances of single-bond ETFs.
Single-Bond ETFs, Explained
For many investors, single-stock ETFs are a straightforward product. The audience for single-bond ETFs is much smaller than that of single-stock ETFs because it is less common for retail investors to bet on the yield curve versus a popular stock. Given that single-bond ETFs hold the latest issuances of their respective tenors, investors strive to pull profits from movements in the yield curve. These ETFs not only act as a one-stop shop for retail clients to gain yield curve exposure; they are also powerful tools for yield curve traders who do not wish to trade in the bond market directly.
ETF wrappers offer more liquidity than underlying bonds, especially for smaller ticket sizes where retail investors can interact directly in the secondary market and in the absence of a market maker. International retail investors may also gain additional benefits from these ETFs, as well as convenient access to the U.S. treasury market. In Canada, these ETFs can be traded via online brokers, while retail clients can only trade underlying bonds via phone inquiries. The trading convenience and pricing transparency also helps facilitate U.S. rates investment among international investors.
For institutional clients, particularly overseas asset managers who want easy access to the U.S. bond market, these ETFs are useful building blocks for portfolio management that offer low-cost, liquid exposure to the U.S. yield curve. In addition, if an active options market develops, it may expand various ETF views on U.S. rates.
ETF wrappers offer more liquidity than underlying bonds, especially for smaller ticket sizes where retail investors can interact directly in the secondary market and in the absence of a market maker. International retail investors may also gain additional benefits from these ETFs, as well as convenient access to the U.S. treasury market. In Canada, these ETFs can be traded via online brokers, while retail clients can only trade underlying bonds via phone inquiries. The trading convenience and pricing transparency also helps facilitate U.S. rates investment among international investors.
For institutional clients, particularly overseas asset managers who want easy access to the U.S. bond market, these ETFs are useful building blocks for portfolio management that offer low-cost, liquid exposure to the U.S. yield curve. In addition, if an active options market develops, it may expand various ETF views on U.S. rates.
The Evolution of ETFs
Like many, new products, single-stock ETFs may sow doubts across the investment community. While the long-term success of single-bond ETFs remains uncertain, it is clear these ETFs create easy access to the U.S. treasury market for domestic and international investors, while boosting the liquidity of the underlying bond market. If these ETFs build staying power, it may not be surprising to see growth in this space.
Considering that ETFs are being used as a wrapper for many asset classes— from broad market indices, to commodity, cryptocurrency, and single securities— we may see more ETF varieties sprout up, especially if single-bond ETFs continue their momentum in the U.S.
Considering that ETFs are being used as a wrapper for many asset classes— from broad market indices, to commodity, cryptocurrency, and single securities— we may see more ETF varieties sprout up, especially if single-bond ETFs continue their momentum in the U.S.
Director and Head of ETF Sales & Strategy, TD Securities
Director and Head of ETF Sales & Strategy, TD Securities
Director and Head of ETF Sales & Strategy, TD Securities
