That's Bond...Ameri-Bond

August 31, 2006

Will Ameristock's new offering leave the fixed income market shaken, but not stirred?

Ameristock Funds, the mutual fund company behind the U.S. Oil exchange-traded fund (ETF) (AMEX: USO), has filed with the Securities and Exchange Commission (SEC) for the right to launch five fixed-income ETFs. The funds will track U.S. Treasury indexes from Ryan ALM, as follows:

Ameristock/Ryan 1-Year Treasury ETF
Ameristock/Ryan 2-Year Treasury ETF
Ameristock/Ryan 5-Year Treasury ETF
Ameristock/Ryan 10-Year Treasury ETF
Ameristock/Ryan 20-Year Treasury ETF

The prospectus is available here.

The funds will be the first new fixed-income ETFs to hit the market in the U.S. in four years, and will fill an important competitive role in the fixed-income universe. Since 2003, when ETF Advisors shut down its fledgling fixed-income ETFs (known as FITRs), Barclays Global Investors (BGI) has been the only company offering U.S. investors ETF-based access to the fixed-income market .

BGI has done very well with the funds, too: Their six fixed-income ETFs boast $18.8 billion in assets.  People have long wondered when one of BGI's competitors would enter the fixed-income arena, and there have been rumors about almost all the fund companies, including State Street Global Advisors (SSgA), WisdomTree and PowerShares.  Now, it looks like Ameristock has beaten them to the punch.

Interestingly, the new funds will track the same indexes as the failed FITRs, namely, Treasury indexes from Ryan. The Ryan indexes differ from the indexes tracked by BGI in that they track the performance of a single-year Treasury - or, at least, the closest approximation to that. For instance, the Ameristock/Ryan 2-Year Treasury ETF will track an index composed of a single security: the most recently auctioned 2-Year Treasury Note.  In comparison, BGI offers a 1-3 year Treasury fund, tracking the blended performance of more than 20 securities. (Note: Ryan's 1-year and 20-year indexes are blends of two securities each: 6-month and 2-year Treasuries for the 1-year Index, and 10-year and 30-year Treasuries for the 20-year index.)

The singular focus of the Ameristock ETFs presents some unique management challenges.  Because the underlying indexes hold just one or two securities, and role them over each time the U.S. government holds a Treasury auction, faithfully tracking the indexes would lead to massive portfolio turnover.  To mitigate this, the fund will hold a mix of securities - including, possibly, futures and other derivatives - designed to let it mimic the underlying indexes. Investors will have to closely monitor tracking error in the early days.

The funds will match the BGI funds on expenses, with both funds charging a management fee of just 15 basis points. It too early to say how the two fund families will compare on "all-in" fees, but Ameristock's streamlined holding structure could possibly give it an edge.

The new Ameristock ETFs will list on the American Stock Exchange (AMEX).

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