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.
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