The S&P 500 Index is all about equities, right? Wrong.

While there are a number exchange-traded funds tied to the equity dividends paid by companies in the S&P 500, the flip side of the index is that many of these same companies issue bonds that pay a yield, which is tracked by S&P 500/MarketAxess Investment Grade Corporate Bond Index.

That index is the basis for the ProShares S&P 500 Bond ETF (SPXB) that began trading on Thursday.

This product is billed as the first ETF to invest exclusively in the bonds of the S&P 500. It contains 1,000 bonds from 206 issuers.

Only 445 of the S&P 500 constituents issue bonds, says Jason Giordano, director of fixed income product management at S&P Dow Jones Indices.

“We focus only on those that are investment-grade bonds,” he explains. “And then we apply additional criteria such as a $750 million minimum par. These bonds are large in size, and we take into account the age of the bonds because age and size offer deeper liquidity because those bonds tend to have more participants in the market.”

Bonds that meet the criteria are ranked by liquidity in descending order. Liquidity is measured by each bond’s 60-day trading day average volume as reported by TRACE, the Trade Reporting and Compliance Engine developed by Finra.

Giordano says the current yield on the S&P 500 bond index is roughly 3.9 percent. The current dividend yield on the equity side of the S&P 500 index is 1.9 percent. 

Michael Sapir, co-founder and CEO of ProShare Advisors LLC, says liquidity is an important factor given all of the concerns that fixed-income securities won't be liquid enough in the event of a market sell-off.

Comfort Level

Conventional wisdom holds that many investors still prefer active management in the bond space. But Sapir posits that market trends show growing interest among financial advisors and retail investors to allocate some of their bond allocations toward ETFs.

“We’ve seen a growing trend over the past couple of years of people migrating toward ETFs for fixed-income exposure,” he says. “Only 17 percent of ETFs are in fixed income. But last year saw 27 percent of flows going into fixed-income ETFs, and it was 32 percent in the prior year.”

He adds that feedback from advisors and self-directed investors indicates they hesitate to put money into bond ETFs because they don’t have a comfort level with those products currently on the market.

“They may see the methodology as being complicated,” he says. “What we think we have with our fund is an index with very stringent requirements around things like liquidity. But there’s also a comfort factor in that the S&P 500 is the most-used index on the planet. Advisors and self-directed investors are very comfortable with the S&P 500, and it provides them with a level of familiarity in investing on the fixed-income side of the components of that index.”

According to ProShares, the SPXB fund contains bonds with stronger credit quality than the broader U.S. corporate bond landscape. Constituents have an average weighted maturity of 11.5 years and an effective duration of 7.7 years.

The fund’s relatively high collective duration, which measures a bond price’s sensitivity to changes in interest rates, suggests that some of the underlying bond prices in the fund might experience volatility in the current rising rate environment.

“Any long-term bond fund will be invested with a longer duration, and by definition upward changes in rates will impact them more,” Sapir says. “I won’t call it more volatile than an average long-term bond fund, but investors concerned about rising interest rates should take that into effect.”

Sapir anticipates that some advisors will use a paired strategy trade involving large-cap U.S. securities that combines SPXB with a product on the equity side of the S&P 500 Index.

SPXB carries an expense ratio of 0.15 percent.