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The Power of Active Bond ETFs [Article & Video]

Source: ETF; republished with permission.

Given the rising rate environment ahead, more investors are looking into actively managed exchange traded funds that are better equipped to adjust and adapt to quickly changing conditions.

ETF Trends publisher Tom Lydon spoke with Jonathan Stanley, Managing Directory and Portfolio Manager at Newfleet Asset Management, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk actively managed bond strategies.

“Active management is, we think, very powerful,” Stanley said. “If you look when people think of a bond market, they think of agency mortgage-backed and U.S. Treasury. We make all our money in all the non cores but satellite sectors, such as high-yield, leveraged loans, emerging markets. That’s what where we think we can make a lot of money for our investors.”

After years of falling rates, benchmark Barclays U.S. Aggregate Bond Index is now heavily tilted toward longer duration U.S. government debt, which may expose investors to increased risks if rates continue to inch higher.

“We think we’ve been in a bull market for the last 30 years, driven by primarily Treasury rates,” Stanley said. “We think now that there’s a potential for rates to increase. We think you have to be cognizant of not only credit risk but interest rate risk, and that’s what we do well at Newfleet.”

Fueling the rising interest rate environment, Donald Trump’s presidential election win and his promises to enact deregulation, implement tax cuts and increase fiscal spending have added to an expansionary outlook. Consequently, the Federal Reserve is considering a tighter monetary policy ahead to head off a potentially overheating economy.

“I think the potential is there for maybe three interest-rate increases,” Stanley said. “A lot will be dependent on what goes on with the U.S. economy and how many things that Trump does as far as getting the U.S. economy gaining steam.”

Consequently, investors may turn to an actively managed bond ETF to better navigate the uncertain waters ahead. For instance, the broad Newfleet Multi-Sector Unconstrained Bond ETF (NYSEArca: NFLT) will target the right areas of the global bond market at the opportune times, implementing active sector rotation and disciplined risk management to achieve long-term excess returns.

The unconstrained investment style does not require a manager to adhere to a specific benchmark. Instead, unconstrained strategies allow a manager to focus on returns across many asset classes and sectors and the styles typically have a more long-term horizon. Moreover, a portfolio manager may use derivatives and other alternative asset classes to hedge market exposure.

The ETF will analyze value assessment of sectors to determine under- and overweights, along with interest rate outlook and sector allocation targets. Next, the team will look at fundamentals and assess credit risks, company management, issue structure and technical conditions. Lastly, the managers will select high-conviction picks across 14 sectors, without restrictions on speculative-grade or non-U.S. securities.

Additionally, the more recently launched Virtus Newfleet Dynamic Credit ETF (NYSEArca: BLHY) will provide a high level of current income and capital appreciation by combining two converging credit sectors, high-yield corporate bonds and floating bank loans. By actively managing the portfolio, Newfleet is able to allocate between both asset classes at any ratio within the fund. Additionally, should market conditions merit a temporary exit from credit, the fund can allocate as much as 100 percent to U.S. Treasuries.

Source: ETF; republished with permission. 

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1Exchange Traded Funds: The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities. 2Credit & Interest: Debt securities are subject to various risks, the most prominent of which are credit and interest rate risk. The issuer of a debt security may fail to make interest and/or principal payments. Values of debt securities may rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities. 3ABS/MBS: Changes in interest rates can cause both extension and prepayment risks for asset- and mortgage-backed securities. These securities are also subject to risks associated with the repayment of underlying collateral. 4High Yield-High Risk Fixed Income Securities: There is a greater level of credit risk and price volatility involved with high yield securities than investment grade securities. 5Foreign & Emerging Markets: Investing internationally, especially in emerging markets, involves additional risks such as currency, political, accounting, economic, and market risk. 6Bank Loans: Loans may be unsecured or not fully collateralized, may be subject to restrictions on resale and/or trade infrequently on the secondary market. Loans can carry significant credit and call risk, can be difficult to value and have longer settlement times than other investments, which can make loans relatively illiquid at times. 7Tax Liability: Noncompliant conduct by a municipal bond issuer, or adverse interpretations, could cause interest from a security to become taxable, subjecting shareholders to increased tax liability. 8Market Price/NAV: At the time of purchase and/or sale, an investor’s shares may have a market price that is above or below the fund’s NAV, which may increase the investor’s risk of loss. 9Prospectus: For additional information on risks, please see the fund’s prospectus. 10Derivatives: Investments in derivatives such as futures, options, forwards, and swaps may increase volatility or cause a loss greater than the principal investment.

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