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Bond ETFs Smarten Up

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Bond ETFs Smarten Up

The smart beta phenomenon is starting to make its way to the world of the fixed income exchange traded funds just as bond ETFs are packing on billions of dollars in new assets. In fact, bond ETFs gathered $70 billion in the first half of 2017, putting the asset class well ahead of the record pace set last year when bond ETFs added $92 billion in new assets.

Although there are some seasoned members of the smart beta bond ETF space, many smart beta bond funds are relatively new, having come to market since the start of 2016. A significant percentage of these ETFs focus on corporate bonds, including the WisdomTree Fundamental U.S. Short-Term Corporate Bond Fund (BATS:SFIG).

“For example, in April 2016, WisdomTree launched four fundamentally focused corporate bond ETFs, in an attempt to identify issuers with healthy balance sheets and cash flows, while tilting toward higher income,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a recent note. “WisdomTree Fundamental US Short Term Corporate Bond Fund scores bonds quarterly based on free cash flow over debt service, leverage and return on investment capital, with the bottom 20% of the credits in each sector (industrials, financials and utilities) removed.”

More On SFIG

SFIG has a 30-day SEC yield of 1.92 percent and an effective duration of 2.44 years. The ETF has a weighted average coupon of 3.42 percent and an average yield to maturity of 2.16 percent.

Just over two-thirds 70 holdings are rated BBB and a combined 30.5 percent are rated A or AA. SFIG charges a very reasonable 0.18 percent per year, or $18 on a $10,000 investment.

A New Entrant

One of the newest competitors in the smart beta bond ETF fray is the Goldman Sachs Access Investment Grade Corporate Bond ETF (NYSE:GIGB), which debuted last month. GIGB tracks the Citi Goldman Sachs Investment Grade Corporate Bond Index.

GIGB has an effective duration of almost 7.1 years and almost 86 percent of the new ETF's holdings are rated A or BBB. As has been the case with other Goldman Sachs ETFs, GIGB is off to a fast start with nearly $55 million in assets under management as of July 14th.

GIGB “focuses on the liquidity and fundamentals of investment grade corporate bonds, the latter based on operating margin and leverage ratio. Similar to SFIG, GIGB removes the 10% lowest scoring issuers in each sector on a quarterly basis,” said Rosenbluth.

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