A Lehman Brothers ETF – Is Not A Lehman Brothers ETF

Posted on October 9, 2008 at 7:23 PM PST by

My title sounds a little stupid, right? Wrong. Many of our MarketRiders members and investors new to ETFs have been worried about having ETFs with the name “Lehman” in their portfolios, particularly the prolific Lehman 1-3 Year Treasure Bond Funds (SHY) or the Lehman TIPs Bond Fund (TIP). Some investors are confused why these ETFs haven’t gone to $0. In fact, some of them are doing quite well this year.

For the new ETF investor, it’s important to understand that ETFs are created based upon a pre-defined index. An index is defined and maintained by an organization – some of which are more credible than others. For example, Standard and Poors has many equity indices like the S&P 500. The Russell 1000, 2000 and 3000 indexes were developed to track a wider breadth of US stocks and were developed by the Frank Russell Company. Morgan Stanley (MS) runs an enormous indexing businesses.

Indexes are licensed to ETF providers. Lehman Brothers is the world’s largest provider of fixed income indices. This means that Lehman defines what basket of debt securities should go into a particular index.

In fact, in our MarketRiders database, there are 52 fixed income ETFs using Lehman indices. We use many of these Lehman fixed income ETFs in our template portfolios that our members can build and manage themselves. Barclays (BCS) uses it for its iShares products, State Street Bank (STT) for its SPDR products, and MarketVectors also uses Lehman indices.

ETFs are based upon the Lehman indices because the provider of these ETFs has licensed the Lehman index for its fixed income products, in order to construct, manage, and maintain what goes into the ETF.

Lehman decides what to put in the index. For example, if you look at the Bonds inside SHY – you’ll find a basket of US Treasury Notes. SPDR Lehman Municipal Bond contains munis from as far as Missouri to Kentucky to Washington State.

The largest bond ETFs in terms of Net Asset Value with nearly $27 billion invested happen to all be based upon Lehman indices: Lehman 7-10 Year Treasury Bond Fund (IEF), Lehman Aggregate Bond Fund (AGG), Lehman 1-3 Year Treasury Bond Fund (SHY), and Lehman iBoxx $ Invest Grade Corp Bond (LQD).

Here are the 52 indices from the MarketRiders database licensed by Lehman. If you look up any of these symbols, you’ll see little co-relation between Lehman’s fate and the fate of these ETFs. But I would assume
that one day soon, Barclays, State Street and MarketVectors will be looking for another way to brand these ETFs.