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ETFs For A Changing Fixed-Income Environment

by
April 28, 2016 8:41 am
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U.S. interest rates have been on a steady downward trajectory since the 1980s. While that may imply fixed income investing has been easier or less risky than equities, the bond market environment has consistently changed.

Exchange-traded funds have made rolling with those changes a little bit easier. Advisors and investors are responding in a big way as highlighted by a deluge of new capital flowing into fixed income ETFs this year. Five of this year's top 10 asset gathering ETFs are bond funds, while no fixed income funds are found among the 10 worst ETFs in terms of lost assets.

TOTL Packs On Assets

One bond ETF that continues packing on the assets is the actively managed SPDR DoubleLine Total Return Tactical ETF (NYSE: TOTL). TOTL, bond king Jeff Gundlach's initial entry into the world of ETFs, is keeping the torrid pace set when the fund came to market last with more than $464 million in year-to-date inflows.

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“Bonds have been in a bull market for years, and numerous factors, including accommodative monetary policy, have helped drive performance. What investors may not realize is that many of the factors that have bolstered this bull market since the financial crisis have also left traditional bond exposures potentially unattractive for what the next cycle may bring,” said State Street Vice President David Mazza in a recent note.

TOTL's duration is less than four years, and investors get a 30-day SEC yield of nearly 2.9 percent. That is well above the yield on 10-year Treasurys. In fact, Treasurys are nowhere close to being TOTL's top holding. The ETF devotes over 56 percent of its weight to mortgage-backed securities and the fund's 10.2 percent weight to emerging markets debt is about 130 basis points more than it devotes to Treasurys.

“QE programs boosted demand for Treasuries while placing downward pressure on bond yields, reducing Treasuries’ income potential compared with historical levels. While there is debate as to whether or not these actions by the Fed were warranted and what impact they had on the economy, the bottom line is that purchasing these assets depressed yields,” added Mazza.

Welcoming Newly Launched ETFs

DoubleLine and State Street recently bolstered their ETF partnership with the launches of the SPDR DoubleLine Short Duration Total Return Tactical ETF (BATS:STOT) and the SPDR DoubleLine Emerging Markets Fixed Income ETF (BATS:EMTL).

STOT sports a modified adjusted duration of just 1.84 years and an average coupon of 2.14 percent. STOT has a yield to maturity of 1.11 percent. The new ETF is managed by Gundlach; Philip Barach, DoubleLine president; and Jeffrey Sherman, CFA and portfolio manager.


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