Thursday, May 15, 2008
I have one of these (except mine isn't coated in gold) for the gym and for hikes. Turns out you can't leave them in your pocket when you do laundry. Oops.
I was reading an article last night about how a couple of different advisors are using bond ETFs and I had a thought about the entire bond market.
If ever there was a segment of the capital markets that needs to be demystified and made more investor friendly it is the bond market. When I write about investment products and what I'd like to see come to the market I often use the word evolution to describe what is going on with ETFs. I think the bond market needs revolutionary change not evolutionary.
The bond market in general is huge. A certain issue may or may not be available at any given time, I get that but the method of price discovery involves placing a phone call looking for a price and getting call back later in the day with a price. If you have to sell you are never going to feel good about the bid you get quoted.
I am very interested in foreign bonds and have written about them several times noting that the minimum order size is $100,000 which makes it tough for do-it-yourselfers to access the space. I think that sort of minimum is totally unnecessary if we are talking sovereign debt.
Even with more esoteric segments of the market there has to be a way to to centralize inventory so that investors can input parameters through a series of drop down menus and the search will deliver what is for sale. The investor either likes what he sees or he doesn't.
Schwab Institutional has something like this for US treasuries, munis and certain corporates but it is a limited inventory, I am talking about centralized inventory. If someone wants five year paper from Chile they should be able to plug that in, see how much is offered and at what price and be able to buy the amount they want. If they want $10,000 out of $4 million offered, they should be able to do it without getting hosed.
Similar to equities I think access for narrow exposures could allow for a superior risk adjusted result. With equities at least investors can choose individual stocks over ETFs or vice-versa but with fixed income this is not necessarily true unless they have huge portfolios. If your portfolio is $10,000 you can put into any stock, or stocks, you want and get a fair price--it may not be a good idea but you have the choice. Not so with fixed income.
Could people hurt their portfolios? Yes. Would be worse than what some folks do to themselves in their equity portfolios? No.
There are probably all sorts of reasons (read excuses) why this can't be done and so I say again that revolutionary change is long overdue, the bond market does not have to be quite so cryptic. At some point maybe congress will Sarbanes/Oxley the bond market or maybe better yet the industry will do something before that happens (to be clear, I am not saying that congress mandating something is the best solution).