A record number of exchange-traded funds were launched in 2023, but two bond ETFs stand out from the crowd, according to a recent report, which listed a Bitcoin fund as among the worst.
“
BlackRock’s
ETF marks the next stage in the evolution of ETFs, while Schwab’s ETF proves there’s still room for improvement of traditional ETFs,” wrote Bryan Armour, Morningstar’s director of passive strategies research and the author of the report. “What ties these two ETFs together is that investors benefit from both.”
The BlackRock ETF offers active management, historically available only via mutual funds, while the Schwab fund has cut costs for investors by starting a fee war in the high-yield bond category.
Rick Rieder, BlackRock’s chief investment officer of global fixed income and the man at the helm of the Flexible Income fund, is one of a number of star mutual fund managers who have opened actively managed ETFs this year. The fund has accumulated $469.3 million in assets since its debut in May.
The expense ratio is 0.40%. In the three months through Dec. 22, the fund is up 5.2%, according to Morningstar.
Nearly 500 ETFs launched this year, including more than 370 active ETFs. As of Dec. 18, there were 1,353 active ETFs with nearly $500 billion in assets, according to Morningstar Direct.
One reason why investors like ETFs is because their fees are generally lower than those of mutual funds. Armour said Vanguard has long played the role of “fee agitator” by entering a new market and undercutting incumbents’ fees.
That pressure on funds to cut their expense ratios to compete has become known as the “Vanguard Effect.” But over the past two years, bond ETF markets have been shaken up by the “Schwab Effect.”
“Schwab added municipal-bond and high-yield bond ETFs that not only gave investors a new low-cost option but also led to fee cuts for investors holding competing ETFs,” Armour wrote.
The Schwab High Yield Bond ETF launched in July with an expense ratio of 0.10%, That matched the lowest-cost high-yield bond ETF on the market, the
SPDR Portfolio High Yield Bond ETF.
State Street
responded by cutting the SPDR Portfolio High Yield Bond ETF’s fee to 0.05%. A tit-for-tat ensued, with Schwab slashing its ETF’s fee to 0.03% from 0.10%.
Competitors followed suit: iShares cut the fee for
iShares Broad USD High Yield Corporate Bond ETF
to 0.08% from 0.15%, while Xtrackers dropped the fee for the Xtrackers USD High-Yield Corporate Bond ETF to 0.05%.
“These fee cuts should save investors over $10 million next year alone,” Armour wrote. The Schwab High Yield Bond ETF, which launched on July 11, has delivered total returns of 6.8% in the three months through Dec. 22, according to Morningstar.
Honorable mentions for the best new ETFs go to
T. Rowe Price Capital Appreciation Equity ETF,
Dimensional World Equity ETF,
and
iShares J.P. Morgan Broad USD Emerging Markets Bond ETF.
And the worst new ETFs? Morningstar singled out Volatility Shares
2x Bitcoin Strategy ETF
and
YieldMax AI Option Income Strategy ETF.
One of 2022’s winners for worst new ETF was
ProShares
Short Bitcoin Strategy ETF. “The reasoning was that ProShares was playing bookie, trying to force a referendum on bitcoin by enticing investors to go long or short.,” said Armour. The 2x Bitcoin Strategy fund “has the potential to be far more destructive,” he wrote.
The fund, which began trading in late June, seeks to achieve twice the daily performance of a Bitcoin futures index. Those contracts tend to closely mimic the price of Bitcoin. So in theory, the fund should rise, say, 2% when the price of the token rises 1%.
But as Barron’s previously reported, buying a leveraged ETF—let alone a leveraged ETF tied to an already volatile asset like Bitcoin—comes with a unique set of risks.
Stuart Barton, CIO of Volatility Shares, said leveraged ETFs aren’t typically designed for retail investors. “The 2x Bitcoin Strategy ETF is aimed as a trading vehicle for people who want exposure to Bitcoin,” he said.
For the three months ended Dec. 22, the ETF has delivered total returns of144%, according to Morningstar.
The YieldMax AI Option Income Strategy ETF, meanwhile, chases not one, but two “terrible” trends, said Armour. The first is betting on single stocks, while the second is an options trading strategy known as covered calls.
“YieldMax merged these two trends into a single-stock covered-call ETF—a strategy that few could ever need,” said Armour. The single stock in this case is
C3.ai,
whose stock ticker is AI.
The company is a provider of enterprise generative artificial intelligence software.
Armour wrote that C3.ai, which has a market capitalization of $3.4 billion, “isn’t a great candidate for a single-stock covered-call strategy, leaving YieldMax’s use of this stock for this strategy misleading, at best.”
Jay Pestrichelli, CEO of ZEGA Financial, the subadvisor for the family of 18 YieldMax funds, said the ETFs are designed to create alternative income for investors.
“There are pluses and minuses on when the strategy should be utilized,” he added. “There is a time and place for single-stock covered-call strategies as the yields on the individual stocks tend to be much higher than an index-based covered-call strategy.”
The ETF was launched at the end of November and returns so far are flat.
Write to Lauren Foster at [email protected]
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