Practical Ways To Hold Down Costs With Bond ETFs

Agency Bonds

Premiums and discounts were slightly higher for ETFs tracking agency bonds, which function nearly like Treasuries (being issued by U.S.-government-sponsored agencies). These are still highly liquid markets, however, and both the average and extreme premiums and discounts were small.

TIPS

The market for Treasury Inflation Protected Securities is slightly less liquid than the market for Treasuries, and both the average and extreme premiums ticked up here. Interestingly, the iShares Barclays TIPS Bond Fund (NYSEArca: TIP) never closed at a discount at any point during the second quarter, suggesting some limits on the redemption process.

Again, however, the average and absolute premiums were very small and likely of little concern to most investors.

The SPDR Barclays Capital TIPS ETF (NYSEArca: IPE) performed better than TIP, with tighter average and absolute premiums.

Blended Funds

As you move into the big corporate/government blended bond categories, the premiums and discounts start to creep up, with some premiums rising above 1%. Three of these funds traded at a premium every single day of the quarter, with only the iShares Barclays Aggregate Bond Fund (NYSEArca: AGG) showing more variable results.

These funds offer exposure both to Treasuries and corporate bonds, and the data suggest that the illiquid corporate exposures had an impact.