All About Bonds

The recent addition of the TOTL (SPDR DoubleLine Total Return Tactical ETF) to the active bond fund space provides some much need diversification to the broad market debt roster.  While we currently list 40 actively managed debt funds, the ETFG Scanner shows only 13 funds in the broad debt category where most funds focus on either one portion of the yield-curve (short maturity) or a specific asset class like EM debt or high yield bonds.  One fund, the PIMCO Total Return Active Exchange-Traded Fund (BOND), controls the bulk of the assets.

Like BOND, TOTL is designed to offer an active management solution for investors looking for a core bond fund  that offers more diversification than buying AGG and was designed to offer different asset class exposure than can be found in the popular DoubleLine Total Return mutual fund.  While the fund is only a few days old, the initial allocation offers to little beyond what the mutual fund already provides.  Both funds offer lower duration than AGG and even though TOTL was not intended as a mortgage backed securities vehicle, the initial allocation at 52% of the portfolio is nearly twice that of AGG and allocates only a small portion of the funds’ assets to the high yield and emerging market space that outperformed in February.

Continuing our hunt for actively managed sector rotation funds, we’ll admit that our prejudice against cloned funds nearly caused us to overlook one of PIMCO’s offerings, the PIMCO Diversified Income Active Exchange-Traded Fund (DI) which unlike “core bond” strategies such as BOND, has delivered on the promise of the funds intended strategy.  Built around investment and non-investment grade corporate debt as well as international bonds (developed and emerging) and with serious underweighting towards Treasuries, DI delivered strong performance in February as high yield spread compression and stabilization in the EM bond market helped lift the fund higher.  But these returns aren’t without their risks as the funds ETFG Red Diamond Risk rating of 5.95 is one of the highest in the space and with significantly higher volatility and deviation than traditional core bond funds.  By way of comparison, the two largest funds in the space, AGG and BND have Red Diamond Risk ratings of 3.11 while core holding BOND is at 3.82.

For those seeking something besides the “usual” from PIMCO or mutual fund clones might want to put two newer and smaller funds on their watchlist; the RiverFront Strategic Income Fund (RIGS) and the AdvisorShares Newfleet Multi-Sector Income ETF (MINC.)  While both funds are actively managed and offer rotation strategies designed to optimize return through a “go anywhere system”, the similarities between the two ends there.  RIGS offers a much more tactical approach, with 99% of the funds allocation in corporate bonds with a heavy focus on short-term high yield debt.  That focus gave RIGS a major shot in the arm in February thanks not just to lower duration than AGG (2.98 to 5.14 as of 12.31) but with the duration coming almost exclusively from high yield bonds where the nearly 100 bps drop in spreads has breathed new life into the high yield sector.

MINC might be more appropriate for those investors seeking sector rotation without the white knuckle experience offered by RIGS.  MINC’s 1 month return of .11% may seem anemic compared to the 1.43% offered up by RIGS, but the fund delivered its outperformance of AGG by offering lower duration, low treasury exposure and a focus on delivering income through asset-backed securities as well as corporate bonds.

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*Please note that ETFs are eligible for ETFG Red Diamond Risk Ratings following 3 months of trading and ETFG Green Diamond Reward Ratings following 12 months of trading.

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