iShares Plans MINT-Like Fixed-Income ETF

March 06, 2012

iShares files paperwork detailing its ticket to get onto the MINT gravy train.

iShares, the world’s-biggest exchange-traded fund company, filed paperwork with the Securities and Exchange Commission to bring to market an actively managed short-term bond ETF in the latest attempt to replicate the successful money market fund proxy fund, the $1.44 billion Pimco Enhanced Short Maturity Strategy ETF (NYSEArca: MINT).

The iShares Ultrashort Bond Fund will invest in fixed- and floating-rate investment-grade securities, including corporate and government bonds, agency securities, instruments of non-U.S. issuers, privately issued securities, asset-backed and mortgage-backed securities, municipal bonds and money market instruments, San Francisco-based iShares said in the filing.

With the inflation outlook uncertain, short-term bond funds are one way for bond investors to protect principal by steering clear of longer-dated securities, whose prices are much more vulnerable to changes in interest rates than short-dated debt. The effective duration of the new iShares ETF’s portfolio will be one year or less under normal circumstances, and the fund will also seek to maintain a weighted average maturity that’s less than three years—almost the exact language contained in MINT’s prospectus.

In contrast to passive ETFs, active ETFs don’t track an index; rather, they depend on the fund’s advisors for performance. The new iShares filing follows similar paperwork filed by Baltimore-based Legg Mason in November detailing an active MINT-like fund called the Legg Mason Western Asset Ultra-Short Duration ETF. MINT looms as proof that investors are ready to adopt an ETF version of a money market type security.

Other short-term bond funds haven’t had any of the success that MINT has had since launching in November 2009. The PowerShares Active Low Duration Fund (NYSEArca: PLK), for example, has gathered only $7.6 million in assets under management since launching in 2008, though comparing it with MINT may not be totally appropriate, as PLK’s effective duration is more than 2.5 years, according to information PowerShares posted on its website.

Details On iShares Fund

iShares said in the filing that the short-dated bond fund comes with certain risks, such as potential high portfolio turnover, which could result in increased transaction costs to the fund, including brokerage commissions, dealer markups on the sale of the securities and on reinvestment in other securities.

It also said the sale of portfolio securities may result in the realization and/or distribution to shareholders of higher capital gains or losses as compared with passively managed ETFs with less active trading policies.

Another potential risk in this ETF is its potential exposure to further deterioration in the housing market through investments in mortgage-backed securities and derivatives tied to the mortgage market.

In its filing, iShares didn’t list a ticker or an expense ratio for the proposed fund.


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