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ETFs Are the New Bond Kings

Exchange-traded funds are transforming debt markets as big investors use them in ways considered crazy a few short years ago.

Leighton Shantz had barely begun managing part of the $26 billion pension fund for Texas state employees when he got a crazy idea.

The fund’s floundering investment-grade bond portfolio was occupying his undivided attention, its strategy clearly broken. No matter what he tried, the securities couldn’t deliver sufficient yield or liquidity. He knew he had to get rid of them; he just wasn’t sure how. The time-tested rules for fixed income, which Shantz had honed for years as a managing director at Lockheed Martin Investment Management Co. and as a money manager for Tennessee’s retirement system for teachers and state employees, no longer seemed to apply.