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FEBRUARY 21, 2012
Indexes crucial when differentiating between bond ETFs, Russell tells investors
SYDNEY, February 21, 2012 - With the imminent introduction of bond ETFs, and a raft of new products likely to hit the market soon, investors and advisers should be aware of key differences in how they are constructed, says Russell Investments.
The global asset manager has released a new research paper on the topic: Overcoming the Limitations in Traditional Fixed Income Benchmarks.
“With 10 new bond ETFs predicted by mid-year, investors will need to differentiate between products and most importantly decide whether an ETF’s risk/return characteristics stacks up against their own risk/return preferences. The way to do this is for investors to understand the index on which the ETF is constructed,” said Clive Smith, fixed income portfolio manager at Russell Investments who authored the paper.
Traditionally, bond indexes have been ‘market weighted’ which results in an investor’s exposure being biased towards the largest creditors/borrowers, Mr Smith explains in the paper. Because of this bias towards the largest borrowers, bond ETFs based on a market weighted index have the potential to expose investors to non desirable market dynamics.
“For example, post the GFC the market experienced a material shift in issuance away from corporate and towards Commonwealth government fixed income securities. This means that in an issuance weighted ETF, investors would have been moving from corporate to Commonwealth government debt at just the time they were receiving some of the most attractive returns seen on corporate debt in a long time. Accordingly investors should more proactively consider whether the composition of their fixed income portfolio fits with their ongoing investment objectives,” said Mr Smith.
Russell will aim to combat this limitation by using equally weighted indexes which capture particular fixed income market characteristics when launching its range of bond ETFs in the near future. “We believe this will be one of the key differentiators of our bond ETF offering,” Mr Smith concluded.
About Russell Investments
Russell Investments is an independent, global financial services firm that provides strategic advice, investment solutions, implementation services and global performance benchmarks that are customized to meet the unique needs of institutional investors, financial advisors and individuals.
Celebrating its 75th anniversary in 2011, and 25 years in Australia, Russell has pioneered innovations that have come to define many of the practices that are standard in the investment world today, and has four decades of experience researching and selecting money managers globally.
Russell has about US$161 billion in assets under management (as of 3/31/11) and works with 2,300 institutional clients, 530 independent distribution partners and millions of individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2 trillion in assets under advisement (as of 12/31/2010) and traded $1.5 trillion last year through its implementation services business. Russell provides leading administration and member services to over 220,000 individuals through its Australian Member Administration Centre. The Russell Global Indexes calculate over 50,000 benchmarks daily covering 63 countries and more than 10,000 securities.
Founded in 1936, Russell is headquartered in Seattle, Washington, USA and has offices in Amsterdam, Auckland, Chicago, London, Melbourne, Milan, New York, Paris, San Francisco, Seoul, Singapore, Sydney, Tokyo and Toronto. For more information about how Russell helps to improve financial security for people, visit www.russell.com/au
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