ETFs as an investment avenue are often associated with passive
fund management style which enables them to be more cost
effective (in terms of expense ratios) than their mutual fund
cousins. However, with the growth of the ETF industry as a whole,
ETF managers are continuously striving for flexibility and new
investors in order to capture more assets.
This paves the way for actively managed ETFs to take center
stage, especially in a highly dynamic market environment. Having
said this, it is prudent to note that there are a number of
actively managed ETFs available in the market today.
However, this article highlights some of the positives of
three such bond ETFs which investors could consider for stability
as well income, especially in this ultra low interest rate
So far this year investors have been fairly upbeat on the bond
ETFs space. In fact some of the biggest names in this front like
iShares iBoxx $ Investment Grade Corporate Bond
), iShares iBoxx $ High Yield Corporate Bond (
) and Vanguard Total Bond Market (
have witnessed significant popularity this year in terms of asset
There clearly has been a reversal in investor risk appetite in
the third quarter as investors shifted focus from the traditional
'low risk' fixed income ETFs which was pretty much the way to go
for investors in the second quarter, to ETFs tracking riskier
asset classes. However, by no means does it imply that investor
appetite has subsided in the bond ETF space (see
Q3 ETF Asset Report: Investors Back in the
Yet this is by no means limited to the passive market, as the
actively managed bond ETF space, many products have seen
significant inflows in their asset base in fiscal 2012. In fact
WisdomTree Emerging Markets Local Debt ETF (
), Peritus High Yield ETF (
) and PIMCO Total Return ETF (
have witnessed positive inflows of around $200 million, $69
million and $2.67 billion respectively in their asset bases so
far this year (source:
WisdomTree Emerging Markets Local Debt ETF (
seeks exposure in sovereign debt securities of emerging markets
denominated in their local currency. ELD is exposed to a variety
of emerging markets, however, it is fairly upbeat on Mexico
(10.63%) and Brazil (10.50%).
Also, allocating a substantial portion of its assets in
countries with stronger balance sheets such as Malaysia (10.27%)
and Russia (7.00%) giving ELD a relatively low amount of worries
on the currency front (read
Buy These Emerging Asia ETFs to Beat China,
However, ELD will be subject to number of emerging market
currencies in total, so the risk is by no means removed.
Additionally, investors should note that the product has an
effective portfolio duration of 4.73 years and an average
maturity of 6.15 years, suggesting that it tracks the
intermediate term of the yield curve and will be subject to
moderate levels of interest rate risk.
The ETF goes beyond tracking an index and strives for steady
income and capital appreciation. A one year look suggests that it
has managed to deliver as it is up by 12.64% on a one year basis
as of September 30
Additionally the yield is quite solid as it has a distribution
yield of 4.25%. Lastly, even though it is an actively managed
ETF, it charges just 55 basis points in fees and expenses.
From the actively managed high yield ETF space we have the
Peritus High Yield ETF (
which primarily aims at consistently high levels of cash flow
streams in the form of interest income.
It invests in a variety of non-investment grade corporate debt
securities by primarily employing a bottom up approach of
securities selection. Some of the features of its highly active
portfolio management are to select value creating securities and
at the same time ensure minimum exposure to default risk.
It does this by eliminating risky leveraged buy outs (LBOs)
based bonds which the company sees as not worth the headaches.
Additionally, as a means of managing risk, it develops trigger
points which exhibit a 'position sell' for individual securities
in its portfolio when it violates a particular level, thereby
Furthermore, as a hedge against negative market movements it
can invest in U.S. Treasuries as and when the need arises (see
Two Intriguing Financial ETFs with a REIT
Thanks to the active management employed by HYLD, it charges a
hefty expense ratio of 1.36%. Nevertheless, the high costing
seems justified when the one year return (as of 30th September
2012) of 15.48% is taken into account.
Moreover, thanks to the ultra low rate policy of the Fed, it
is an appropriate choice for income starved investors as it pays
out a solid distribution yield of 8.27%. However, it comes at the
expense of credit quality. The product has amassed an asset base
of $137.73 million and an average daily volume of about 31,000
PIMCO Total Return ETF (
is the ETF version of PIMCO's flagship blockbuster mutual fund
PIMCO Total Return Institutional Fund (
However, the $3.21 billion ETF has been outperforming its
gigantic $169.32 billion mutual fund cousin since its inception
in March of 2012.
The ETF has returned 9.93% since its inception while the
mutual fund has returned 6.23% for the same time period. While
having a much lower asset base certainly has allowed BOND to do
well, one has to wonder if this outperformance can continue into
Still, just to highlight the disparity between the two, BOND
and PTTRX have a correlation of just 65% between the two since
the launch of the ETF. Also, their one month rolling correlation
has never increased 87% and has even gone to the extent of
hitting a low of 30%, although there is admittedly a small sample
The ETF targets to maintain its weighted average duration in
alignment with that of the Barclays Capital U.S. Aggregate Bond
Index, with a maximum deviation of two years either way. The ETF
measures the performance of investment grade debt securities
which are issued by corporates, government and other institutions
(see more in the
Zacks ETF Center
Interestingly, around 86% of the total assets of the ETF is
allocated to Mr. Gross'
"Ring of fire"
(i.e. countries with highest levels of fiscal deficit as a
percentage of their GDP) countries. These are U.S 76%, France 1%,
Japan 2%, Spain 3% and United Kingdom 4%(source
Time to Consider Chinese Yuan ETFs?
Nevertheless the ETF could be an appropriate core holding for
investors seeking an exposure to total bond markets. It charges
investors 55 basis points in fees and expenses and has been one
of the highest asset accumulating ETFs this year.
On average, the product does about 477,000 shares daily and
targets the intermediate end of the yield curve, thereby
maintaining an effective duration of 5.2 years. The ETF has a 30
Day SEC yield of 2.09% so it isn't exactly a big yielder although
it arguably is a more stable choice in the segment.
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VANGD-TOT BOND (BND): ETF Research Reports
PIMCO-TOT RETRN (BOND): ETF Research Reports
WISDMTR-EM LDF (ELD): ETF Research Reports
ISHARS-IBX HYCB (HYG): ETF Research Reports
PERITUS-HIGH YL (HYLD): ETF Research Reports
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