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Insights   •   Fixed Income

Keep More of What You Earn with Fixed Income ETFs Mutual Fund Investors Can Save

Whether you seek broad index or targeted exposures, fixed income ETFs offer diversification across numerous bond issues at a lower cost than their mutual fund peers.


US-listed fixed income ETF assets have grown at an annualized rate of about 38% since 2002 to reach $1.1 trillion,1 as a result of their transparency, liquidity, flexibility, and more importantly low cost.

With a median net expense ratio of just 0.25% versus 0.64% for fixed income mutual funds, fixed income ETFs are, on average, 60% lower cost than their mutual fund counterparts. The median net expense ratio for an active fixed income ETF is also lower versus its active fixed income mutual fund peer, 0.39% vs 0.65%.2 The difference in costs is a result of the different operating structures of the two investment vehicles that lead to higher operating expenses for mutual funds relative to ETFs.

While both ETFs and mutual funds must distribute any capital gains to shareholders at the end of each year, decreasing their return on investment, ETFs generally distribute fewer capital gains. The improved tax profile for ETFs is a result of the tax efficient in-kind redemption process used to meet shareholder redemptions. Additionally, the ability for investors to transact with each other in the secondary market when buying or selling ETF shares reduces the number of primary market transactions (creation/redemptions) needed for ETFs, especially for the small number of ETFs that cannot deliver all securities in-kind (e.g., some active fixed income strategies and certain securities within emerging market funds).

Mutual funds are not structured to support this tax efficiency. Because mutual fund investors interact only with a fund, all inflows and outflows are in the form of cash — not with the underlying securities like ETFs. As a result, when mutual funds have redemptions, fund managers must sell securities to raise cash to meet the redemption, creating a possible capital gains event for all shareholders.

The difference in capital gains distributions between ETFs and mutual funds is staggering. In 2020, just 7% of all ETFs distributed capital gains compared to 49% of mutual funds. For fixed income, just 19% of ETFs distributed capital gains compared to 36% of mutual funds.3 And as shown below, over three years, fixed income ETFs distributed roughly half of the short- and long-term capital gains as did mutual funds.4

Figure 1: 3 Year Average Percent of Funds with Capital Gains

Fixed income ETFs can also help investors to reduce their total cost of ownership, offering:

• Diversification across numerous bonds with a single trade
• Access to market segments where purchasing individual bonds is prohibitively expensive
• Trading on an exchange at a market-determined price, just as with equities
• Improved liquidity, enabling the quick reallocation of portfolios or meeting investor redemptions

How Can SPDR® Fixed Income ETFs Reduce Your Costs?
In 97% of the cases, SPDR® fixed income ETFs cost less than their mutual fund peers. With a median expense ratio of just 0.20% versus 0.60% for their mutual fund peers, in most cases SPDR fixed income ETFs cost about half of a comparable mutual fund.5

Cost differences vary drastically across fixed income asset classes. In some instances, the SPDR fixed income ETF is more than 9x less expensive than the median mutual fund in the comparable Morningstar category.6 These savings can meaningfully impact performance, especially in a low-yield environment.

Providing exposures to various maturities, credit qualities, sectors, geographies and currencies, the range of low-cost SPDR fixed income ETFs brings flexibility and opportunities for greater diversification to the part of an investment portfolio that historically has been challenging to build, allowing you to:

Rebuild the Agg
ETFs can be useful tools to gain different exposures — both within and beyond the Agg. In fact, you can rebuild the Agg — making tactical overweights and underweights to optimize specific yield and duration preferences — with the range of SPDR fixed income ETFs. And using ETFs to expand beyond the Agg and/or dissect the Agg's sectors to target specific risk and return characteristics can better position portfolios for the current income regime at a lower cost.

Figure 2: Median SPDR ETF Expense Ratio vs. Comparable Mutual Funds by Broad Category

Position Along the Yield Curve with Treasuries
The SPDR® Treasury suite provides cost-efficient exposure to nominal US Treasuries across various maturity bands. These exposures offer you the ability to position along the yield curve to tailor portfolio risk and income characteristics with agility and focus.

Figure 3: Treasuries – SPDR vs. Open End Mutual Funds

Invest in Corporates Across Segmented Maturity Bands
The SPDR® Portfolio ETF Corporate Bond suite provides low-cost exposure to broad investment grade corporate bonds across segmented maturity bands. These exposures allow you to position along the corporate credit curve to tailor portfolio risk and income characteristics.

Figure 4: Corporates – SPDR vs. Open End Mutual Funds

Overweight Mortgages in the Core
SPDR® Portfolio Mortgage Backed Bond ETF (SPMB) is a low-cost ETF that provides exposure to agency mortgage-backed securities of the US Investment Grade bond market. Mutual fund competitors are over 13x the cost of SPMB, as shown below.

Figure 5: SPMB vs. Intermediate Government Open End Mutual Funds

Incorporate Non-Core Bond Sectors
Ancillary bond segments, such as emerging market debt or senior loans, can provide potential benefits to investors who find that mortgages, Treasuries and corporates are too narrow to meet their objectives without overconcentrating the portfolio in any one sector. To seek income and modulate credit risk across a variety of exposures, you can adjust your allocation with SPDR fixed income ETFs that cost less than their mutual fund peers.

Figure 6: Non Agg Sectors – SPDR vs. Open End Mutual Funds

Consider Municipal Bonds to Improve Tax Efficiency
SPDR’s municipal bond suite is managed by Nuveen, a leading municipal bond investment manager with 122 years of asset management experience.7 You can use the SPDR Municipal Bond suite to seek income without overextending on credit risk, while also improving the tax efficiency of your fixed income allocation — all at a lower cost relative to owning single issues or mutual funds.

Figure 7: Municipal Bonds – SPDR vs. Open End Mutual Funds

Construct a Customized and Cost-effective Core
The low-cost SPDR® Portfolio ETFs™ suite — with over $100 billion in assets — can help you build a customized, low-cost core. With a median expense ratio of just 6 basis points, the SPDR Portfolio ETFs fixed income suite is 89% less expensive than similar mutual funds.8 And the median bid-ask spread of just 1 penny can help you limit trading costs.9

Figure 8: SPDR Low Cost Core Fixed Income Funds vs. Mutual Funds

Pursue Alpha with Active Fixed Income ETFs
SPDR also works in partnership with widely revered fixed income managers such as DoubleLine, Blackstone Credit, and Nuveen to offer investors access to a range of skilled active portfolio managers. As shown below, in most cases, SPDR’s active core and non-aggregate bond strategies cost less than comparable mutual funds.

Figure 9: Active Fixed Income SPDR ETFs vs. Mutual Fund Peers

Look Ahead with a Leader in Fixed Income Investing
SPDR fixed income ETFs are built and powered by the same expertise and resources that have made us one of the world’s leading fixed income institutional managers and a pioneer in ETF investing. As a global leader in fixed income ETF investing, State Street Global Advisors offers:

The scale to specialize

  • From across the globe, our portfolio managers, traders and investment strategists offer their unique insight and specialized fixed income strategies.
  • $551 billion in fixed income assets, managing 30+ currencies across 40 different countries, as of March 31, 2021.10
  • Dedicated capital markets team provides 24-hour coverage across global markets, offering enhanced liquidity and cost-efficient trading strategies.

A proven track record

  • 25 years of bond investing — our first fixed income index fund launched in 1996.
  • More than 100 fixed income strategies, providing investors choice and access to previously unreachable asset markets and strategies.
  • More than 140 fixed income professionals dedicated to conducting research, innovating new fixed income solutions managing risks and costs, and supporting clients.

ETFs are on a record-setting fund flow pace through the first four months of 2021 with fixed income ETFs gathering roughly 25% of flows.11 We expect strong flows into low-cost, tax-efficient ETFs to continue, especially if tax rates increase and the low-yield environment persists. As their benefits become more broadly explored and understood, fixed income ETFs will continue to increase in number and variety, creating greater application opportunities.

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