How to choose an ETF, example 2

In the previous example, you saw how I searched for an ETF that replicated the performance of the S&P 500 index and had all the features I wanted. All in all it was easy and fairly quick, even though my search initially yielded a high number of results.

I now want to include in my portfolio an ETF that invests in long-term US bonds (i.e., 10 years or more) and that is liquid, has been on the market for at least 5 years, has no exchange rate issues, has physical replication, distributes returns and is low cost. Unlike in the previous example, here I want to receive the income periodically. I set up my search by selecting “United States”, “Government” and “10+” as the maturity.

There are only 8 results, which makes the selection process a lot easier.

Unlike in the previous example, this time I will sort the ETFs by currency by clicking on “Fund CCY”.

There are only three EUR or EUR hedged ETFs:

• iShares USD Treasury Bond 20+yr EUR Hedged UCITS
• Lyxor US Treasury 10+Y (DR) UCITS ETF – Monthly Hedged to EUR – Dist
• UBS ETF (LU) Bloomberg US 10+ Year Treasury Bond UCITS ETF (hedged to EUR) A-dis

None of the three is very well capitalised; the largest is iShares USD Treasury Bond 20+yr EUR Hedged UCITS, which is also the ETF I choose. In addition to its low capitalisation, UBS ETF (LU) Bloomberg US 10+ Year Treasury Bond UCITS ETF (hedged to EUR) A-dis has costs that are more than double those of the other two, and Lyxor US Treasury 10+Y (DR) UCITS ETF – Monthly Hedged to EUR – Dist has underwhelming results in previous years.

The iShares USD Treasury Bond 20+yr EUR Hedged UCITS ETF has been on the market for less than 5 years, exactly 4 years and 1 month at the time of writing. Although its capitalisation is not large (only 138 million), the ETF, which is listed on the London Stock Exchange (LSE), has high volumes and therefore does not seem to have liquidity problems. Keep in mind that, as you have seen, the longer the maturity of the bonds, the more the price reacts to changes in interest rates.

As in the previous example, by clicking on the name you can see all the features, such as the list of all the bonds that make up the ETF and their weight within the basket. You can also download the fact sheet and the KIID. Alternatively, as mentioned above, just search the ETF name on Google and then look at its characteristics directly on the issuer’s website.

So, you’ve seen how I chose an ETF on US bonds that matched my investment idea as closely as possible. There will not always be an ETF or ETC that has all the characteristics you are looking for. In that case, you either accept the closest one, which has at least all the most important qualities, or you change investment type (and ETF).