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.
$608 billion in fixed income assets, managing 30+ currencies across 40 different countries, as of September 30, 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.
1 Morningstar, as of 04/30/2021. 2 Morningstar, as of 03/31/2021. Oldest share class of US listed Fixed Income ETFs and Mutual Funds. 3 Morningstar, as of 03/31/2021. Calculations by SPDR Americas Research. Based on oldest share class. 4 Morningstar, as of 03/31/2021. Calculations by SPDR Americas Research. Based on oldest share class. 5 Morningstar, as of 04/28/2021. Based on oldest share class mutual funds of similar Morningstar Category. 6 Morningstar, as of 04/28/2021. 7 Nuveen Asset Management, as of 12/31/2020. 8 Morningstar, as of 04/13/2021. Measured against oldest share class of mutual funds in the respective Morningstar category. 9 Bloomberg Finance, L.P., as of 03/31/2021. 10 State Street Global Advisors, BIG, as of 09/30/2021. 11 Bloomberg Finance, L.P., State Street Global Advisors, as of 04/23/2021.
Bloomberg Barclays US Aggregate Bond Index A benchmark that provides a measure of the performance of the US dollar-denominated investment-grade bond market. The “Agg” includes investment-grade government bonds, investment-grade corporate bonds, mortgage pass-through securities, commercial mortgage-backed securities, and asset-backed securities that are publicly for sale in the US.
Emerging Markets Developing countries where the characteristics of mature economies — such as political stability, market liquidity, and accounting transparency — are beginning to manifest. Emerging market investments are generally expected to achieve higher returns than those of developed markets but are also accompanied by greater risk, decreasing their correlation to investments in developed markets.
High Yield A company or bond that is rated “BB” or lower is known as junk grade or high yield, in which case the probability that the company will repay its issued debt is deemed to be speculative.
Investment-Grade Credit A fixed-income security, such as a corporate or municipal bond, that has a relatively low risk of default. Bond-rating firms, such as Standard & Poor’s, use different lettered descriptions to identify a bond’s credit quality. In S&P’s system, investment-grade credits include those with “AAA” or “AA” ratings (high credit quality), as well as “A” and “BBB” (medium credit quality). Anything below this “BBB” rating is considered non-investment grade.
Senior Loans Floating-rate debt issued by corporations and backed by collateral, such as real estate or other assets.
Treasuries The debt obligations of a national government. Also known as “government securities,” Treasuries are backed by the credit and taxing power of a country, and are thus regarded as having relatively little or no risk of default.
Volatility The tendency of a market index or security to jump around in price. Volatility is typically expressed as the annualized standard deviation of returns. In modern portfolio theory, securities with higher volatility are generally seen as riskier due to higher potential losses.
Yield The income produced by an investment, typically calculated as the interest received annually divided by the price of the investment. Yield comes from interest-bearing securities, such as bonds and dividend-paying stocks.
Important Risk Discussion
The views expressed in this material are the views of Matthew Bartolini, Emily Theurer and Martin Dunn through the period ended April 30, 2021, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Investing involves risk, including the risk of loss of principal.
Diversification does not ensure a profit or guarantee against loss.
This communication is not intended to be an investment recommendation or investment advice and should not be relied upon as such.
The value of the debt securities may increase or decrease as a result of the following: market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or illiquidity in the debt securities markets; the risk of low rates of return due to reinvestment of securities during periods of falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. This may result in a reduction in income from debt securities income.
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Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investing in high yield fixed income securities, otherwise known as “junk bonds,” is considered speculative and involves greater risk of loss of principal and interest than investing in investment-grade fixed income securities. These lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
High-yield municipal bonds are subject to greater credit risk and are likely to be more sensitive to adverse economic changes or subject to greater risk of loss of income and principal than higher-rated securities
Actively managed funds do not seek to replicate the performance of a specified index. An actively managed fund may underperform its benchmarks. An investment in the fund is not appropriate for all investors and is not intended to be a complete investment program. Investing in the fund involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.
Investments in Senior Loans are subject to credit risk and general investment risk. Credit risk refers to the possibility that the borrower of a Senior Loan will be unable and/or unwilling to make timely interest payments and/or repay the principal on its obligation. Default in the payment of interest or principal on a Senior Loan will result in a reduction in the value of the Senior Loan and consequently a reduction in the value of the Portfolio’s investments and a potential decrease in the net asset value (NAV) of the Portfolio. Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates. Narrowly focused investments typically exhibit higher volatility and are subject to greater geographic or asset class risk. The fund is subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal.
State Street Global Advisors Funds Distributors, LLC is the distributor for certain registered products on behalf of the advisor. SSGA Funds Management has retained Blackstone Liquid Credit Strategies LLC, DoubleLine Capital LP and Nuveen Asset Management as the sub-advisor. State Street Global Advisors Funds Distributors, LLC is not affiliated with Blackstone Liquid Credit Strategies LLC, DoubleLine Capital LP and Nuveen Asset Management.
DoubleLine® is a registered trademark of DoubleLine Capital LP.
Because of their narrow focus, financial sector funds tend to be more volatile. Preferred Securities are subordinated to bonds and other debt instruments, and will be subject to greater credit risk. The municipal market can be affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. The fund may contain interest rate risk (as interest rates rise bond prices usually fall); the risk of issuer default; inflation risk; and issuer call risk. The Fund may invest in US dollar-denominated securities of foreign issuers traded in the United States.
Investments in emerging or developing markets may be more volatile and less liquid than investments in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., member FINRA, is the distributor for DIA, MDY and SPY, all unit investment trusts. ALPS Portfolio Solutions Distributor, Inc., member FINRA, is the distributor for Select Sector SPDRs. ALPS Distributors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are not affiliated with State Street Global Advisors Funds Distributors, LLC.
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