Exchange-traded funds based on fixed-income indices appear to be near SEC approval. Paul Roye, director of the Security and Exchange Commissions division of investment management, addressed the issue earlier this week at a conference on ETFs sponsored by the American Stock Exchange in New York City.
In June 2001, Barclays Global Investors filed applications for five fixed-income iShares that would be based on Lehman Brothers treasury indices, according to Christine Hudacko, a spokesperson for Barclays (MFMN 7/10/01). At the time, Hudacko anticipated that the SEC would approve the new products in the fourth quarter of 2001, but it didnt happen. The SEC has worked out most of the nuances however, and the products will likely be approved soon, according to Roye.
There are several issues that are unique to fixed-income indices, Roye said. The Commission had to consider what types of fixed-income securities would make up the ETF and if they would offer enough liquidity. Also, trading fixed-income securities involves different mechanisms for settling and clearing, he said. Finally, the notion of credit risk had to be examined, not for ETFs based on U.S. government bond indices of course, but for indices based on junk bonds and other less stable investments.