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A Conservative Approach To Bond ETFs

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October 13, 2016 2:38 pm
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A Conservative Approach To Bond ETFs

Many fixed income investments are viewed as conservative, but in today's potentially turbulent bond markets, it does not hurt to get some assistance. The SPDR DoubleLine Total Return Tactical ETF (NYSE: TOTL) is an exchange-traded fund that can do just that.

Taking On TOTL

TOTL, Jeff Gundlach's first entry into the ETF space, debuted in February 2015 and already has nearly $3 billion in assets under management, making it one of the fastest-growing active and fixed income ETFs on the market today.

For bond investors concerned about duration, a bond's sensitivity to changes in interest rates and looking for alternatives to the traditional aggregate bond approach, TOTL is a must-know ETF.

Related Link: Fidelity Has A Say In ETF Fee Tussle

“To build a conservative core, investors can seek an exposure that limits duration, aiming to add stability, while providing exposure to multiple bond sectors to boost diversification and add income potential. Given that TOTL has a duration that is approximately one year less than the Agg and it does not have a strict cap on duration, it may not meet the needs of conservative investors,” said State Street Vice President David Mazza in a recent note.

TOTL has star power on its side, as it is managed by DoubleLine Capital, Jeff Gundlach's firm. That is an advantage for bond investors in the face of an unpredictable Fed.

TOTL is actively managed, which gives investors another advantage at times of Fed unpredictability because Gundlach's team does not need to be married to Treasurys and U.S. government agency debt.

Another Option: STOT

For the fixed income investor looking to gain the advantages of TOTL's active management, again courtesy of DoubleLine, with an even lower duration, there is the SPDR DoubleLine Short Duration Total Return Tactical ETF (BATS: STOT). STOT debuted in April and already has more than $25 million in assets under management.

More importantly, STOT has a modified adjusted duration of just 2.4 years and a 30-day SEC yield of 2.41 percent.

“Because it is able to invest in multiple fixed income sectors, STOT's sector allocation is more diverse across less correlated and higher yielding areas of the bond market than the 1-3 year Agg slice,” added Mazza. “With shorter duration but not shorter maturity as the target objective, an investor could use STOT as a conservative fixed income core that follows our Three C’s framework and provides the basics of a core position: income, diversification and stability.”

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