SPSB: A Great Example Of How To Take A Lot Of Risk And Not Realize It (NYSEARCA:SPSB)

By Rob Isbitts

Strategy

SPDR Portfolio Short Term Corporate Bond ETF (NYSEARCA:SPSB)

Proprietary ETF Grades

• Offense/Defense:Defense

• Segment:Bonds

• Sub-Segment:Corporate

• Risk (vs. S&P 500):Low

Proprietary Technical Ratings

Holding Analysis

SPSB owns corporate bonds, mostly rated A and BBB. Maturities are 1-3 years for the most part, though a modest portion of the ETF is in bonds with maturities out to 5 years.

Special Commentary: Short-term bond risk in the current market climate

To understand the risk I believe investors are taking in SPSB and other ETFs of that ilk, here’s a chart of 3 short-term bond ETFs. However, unlike SPSB, these invest in US Treasuries, either T-Bills or Floating Rate Notes. I recent wrote about 2 of them for Seeking Alpha, iShares Short Treasury Bond ETF (SHV) and iShares Treasury Floating Rate Bond ETF (TFLO).

This chart above shows the “annualized 1-month total return” for TFLO and 2 ETFs that own nothing but US T-Bills. Thus, they invest out no more than 12 months to maturity. On the left, you see the tail end of a years-long predicament for bond investors: no yield. Then, the spike higher. The pair of T-Bill yields moved up sharply, as did TFLO. The yield is essentially their return, since as you can see, even when you take 1 month of return and annualize it, you still don’t get as much as a 1% loss in value. In other words, when these ETFs do dip a bit, it is typically measured in fractions of 1%.

More importantly, from the hours I have spent in the Seeking Alpha comments sections, conversing with readers about the short-term bond ETFs I write about, there appears to be a common misperception about how much these securities actually yield right now.

The problem is in the way data services report “yield” on these ETFs, at a time when rates went from near zero to over 4% in a flash. Yield is typically reported by taking the last 12 months’ worth of dividend payments from the ETF, adding them together, and dividing by the current price of the ETF. Since, as you can see above, the first half of 2022 produced near-zero yields. But in the last several months, it has been night and day.

In the chart, each point represents 1 month’s dividend, multiplied by 12 (months). This provides a much more accurate current assessment of what the ETF is truly delivering right now. And with short-term bond ETFs, “right now” means a lot more than it does for most other ETF asset classes.

The confusion created when an investor sees a “yield” of, say 1.5% when nearly all of that yield was generated in the past 4 months (implying more like a 4.5% yield if you bought it now) is at the crux of this issue. Some investors take my explanation in the comments section and it clarifies things for them. However, a few, shall we say, “aggressive” folks have insisted that these ETFs have lousy yields, and that I am some sort of messenger of bad investment opinions. After all, who would invest for 1.5% when you can buy T-Bills directly for 3 times that? The answer is no one, including me!

But the facts are this: the yields you see on the far right of that chart above are the true ETF yields, at least currently. They can change dramatically based on the Fed and the action in the bond market. But as I write this, the annualized rate of interest paid on those 3 ETFs, based on their last monthly dividends, are the figures you see on the right in 3 different colors. I certainly hope this clears things up for many investors. If not, I’m happy to continue to educate on it, both in articles and the comments.

Now, take a look at the same chart, but with 3 different ETFs pictured. All 3 of these could be considered “low volatility ETFs” in normal times. But these are not normal times. So, anything that is non-US Treasury debt carries risk of loss that is at least a notch higher than the ones shown above.

We are not talking about equity market-style risk here. Nor is this comparable to long-term bond risk, Treasuries or otherwise. But there is a potential “surprise factor” here that I believe all investors should acknowledge. This is not a prediction that something bad “will” happen, only that it “could” happen.

As you can see, these ETFs have had annualized losses in a month of 15-20%. That’s no big deal for a month or so. But in a credit crisis as we’ve seen in the past, and as recently as 2020, any credit risk can result in that nasty surprise. In the case of SPSB, it has lost as much as 12% from peak to trough. It recovered, but that’s no assurance it will do that as soon the next time around. Again, these are very strange, illiquid, and emotional times in both the bond market cycle and in market history.

Thus, I’m just asking investors to take an extra pause when considering these types of ETFs. Because it is one thing to lose a chunk of money on an equity ETF, a commodity ETF or a long-term bond ETF. But a price shock in something like these is something that can do more harm to an investor’s confidence than some realize.