This report does not constitute a recommendation or advice to purchase any investment. The author does not hold any certifications in accounting or finance. This report reflects the author's opinions based on publicly available financial documents, which are clearly referenced so that the reader can study the sources and form their own opinions.
SHV is an exchange traded fund (ETF) in the iShares family. This fund seeks to reflect the “Barclays Capital Short U.S. Treasury Index”, a proprietary index. This presently means that SHV holds U.S. Treasury debt with remaining maturity between 1 and 12 months, currently averaging 5 months.
The SHV product description does not obligate the fund to actually hold treasury notes, only to “seek investment results that correspond generally to the price and yield performance” of the proprietary index. In other words, there is no guarantee or even a technical obligation for the fund to hold short term treasury notes.
As of 2009-05-12, the fund holds $2.0 billion in net assets of which 98.8% are U.S. Treasury notes maturing within one year. The fund's annual expenses are 0.15%.
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Regulatory documents (financial statements):
The Schedule of Investments is given on page 21 of the 2009 Annual Report to Shareholders and provides a snapshot of the fund's holdings on 2009-02-28.
Virtually all of the fund's investments are coupon-paying U.S. Treasury Notes maturing within one year. There are insignificant (nil) amounts in money market funds. A more complete picture of the fund is given in the Statements of Assets and Liabilities, found on page 59 of the 2009 Annual Report to Shareholders.
On the assets side of the balance sheet, U.S. Treasury debt accounts for 99.96% of the fair value of investments, while money market forms the remaining 0.04%. The footnote shows that no securities are on loan from this fund. These are all very good signs. The fund has a simple composition and no securities lending risks at this time.
However, to get a better sense of the fund, one has to look back to earlier periods. The previous semi-annual report, providing a snapshot on 2008-08-31, shows much different fund composition and major warning signs.
Back on 2008-08-31, U.S. Treasury debt accounted for only 80.95% of the fair value of investments, while money market formed the remaining 19.05%. These money market funds are held by the fund in lieu of treasury notes which have been loaned out to an investment bank, Barclays Capital Inc. The fund had loaned out 22.6% of its net assets, which means that nearly a quarter of fund net assets were given to an investment bank in exchange for lower quality money market collateral.
In summary, the current (2009-02-28) fund holdings look just about ideal and risk-free, while the 2008-08-31 holdings are riskier.
While the most recent reporting period indicates zero securities lending, the prior period shows enormous securities lending and substantial risk (22.6% of net assets on loan to Barclays Capital Inc). One must raise serious concerns about a fund which swapped out the highest quality treasury notes in exchange for lower quality money market fund units.
Page 95 of the 2009 Annual Report to Shareholders describes the securities lending arrangement: “Pursuant to an exemptive order issued by the U.S. Securities and Exchange Commission (“SEC”), the Funds are permitted to lend portfolio securities to BarCap [Barclays Capital Inc.].”
If Barclays Capital, the investment bank, were to collapse or become insolvent while it has borrowed assets from one of the iShares ETFs, the ETF could face losses. Securities lending is an accepted and normal activity in the mutual fund industry, allowed by the SEC and other regulators, but this author believes that there is counter-party risk in securities lending which can lead to losses for shareholders.
Recently, it has been announced that Barclays is selling its iShares business. It is therefore not clear how the iShares ETF management may change and this further complicates the questions regarding fund management practices.
SHV is a large fund that appears to have very pure composition. The most recent financial statements show that the fund does indeed purely hold U.S. Treasury notes near maturity, which are liquid securities with practically zero credit risk. Additionally, the most recent financial statements do not show any securities out on loan. This is a very encouraging sign, as none of the fund's assets appear to be exposed to counter-parties.
However, the prior period (6 months earlier) shows that the fund has engaged in substantial securities lending, and had loaned out a significant amount of net assets – 22.6% – to a related investment bank, Barclays Capital Inc. There is a big shift between the August 2008 and February 2009 fund behaviour, and this causes concern.
Because an investor can not know what the fund is doing with their money today, other than reading financial statements from the past, it would be reasonable to exercise caution with SHV until there is more assurance that the fund will remain free from excessive securities lending. Since the documents from just 6 months ago illustrate a dangerous situation, the recent history of this fund has warning signs.
SHV is similar to BIL (SPDR Barclays Capital 1-3 Month T-Bill ETF). Comparing the two ETFs, SHV holds longer duration bonds (5 month average versus BIL's 2 month average) which means that SHV can experience greater changes in value as interest rates change – and potentially decline over short periods.
As of the most recent financial statements, BIL engages in substantial securities lending while SHV currently does not engage in any. Currently, SHV appears to be a safer alternative. Over the last 12 month period, however, both funds have engaged in the same (risky) lending activities.
Because the author does not know how SHV
management practices may change, and given the recent warning signs
in its history, it is reasonable to say that SHV does have risks
beyond what one would expect from a fund that is supposed to hold
treasury notes or t-bills. One or two more financial reporting
periods indicating zero securities lending would provide good
assurance that fund management no longer engages in this practice.
(end of report)
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