Fixed Income: U.S. - Broad Market
The US Broad Market segment provides one-stop exposure to a wide range of fixed-income sectors with wide latitude toward credit quality and maturities. Funds in this segment can reach into
“Think about this space as the popular US Agg segment plus high-yield exposure” different bond sectors such as Treasurys, agency MBS and corporate bonds (investment-grade and high-yield), etc. They don’t have a maturity target. Think about this segment as the popular US Agg segment plus high-yield exposure.
Funds in this segment can be broken down into three groups: vanilla, optimized and true active. IUSB is the only “vanilla” fund that provides a market-value-weighted exposure of the segment. It is the best Fitting fund to our market-value-weighted benchmark.
INC and BYLD are the two model-based optimized funds. Despite the difference in their methodologies, they essentially try to achieve the same goal—better risk-adjusted returns—via different approaches. INC tries to balance interest-rate risk and credit risk, while BYLD uses a straightforward but unusual yield optimization model.
GMTB, the lone true active fund here, is also the oldest fund in the segment. Despite its claim to provide better risk-adjusted returns, we see no statistical significant alpha to our benchmark thus far. Investors haven’t shown much interest in GMTB, leading to high closure risk. (Insight updated 11/22/17)
All Funds (6)
IUSB $1.87 B 1868291840 AUM & Trading Leader
FIBR $139.91 M 139910540 Quasi-active
BYLD $27.45 M 27454350 Low AUM & ADV
AGGP $352.33 M 352329319.962 N/A
GMTB $7.76 M 7761367.39 High closure risk
INC $74.33 M 74332950 Quasi-active
ETF.com Grade as 11/16/17
Fixed Income: U.S. - Broad Market
ETF.com Efficiency Insight
Funds in this segment are quite a bit more expensive than vanilla funds in the US Agg segment. Given the nonvanilla methodologies (except IUSB) of the funds, higher fees seem to be
“we see closure risk for GMTB” reasonable. Since all the index-tracking funds in the segment are relatively new, we don’t have tracking difference metrics to evaluate true holding cost just yet.
IUSB charges the lowest fee for its vanilla strategy. Given the breadth of its coverage, its fee seems reasonable. We will know more about its tracking in late 2015.
BYLD and INC charge similar fees for their respective quant-model-driven strategy. However, INC is an actively managed fund, so tracking will be a nonissue. BYLD’s quant-model-driven optimization strategy may lead to higher portfolio turnover, which can lead to capital gains distributions.
GMTB charges the highest fee in the segment, on par with other true active bond funds. With the smallest asset base in the segment, we see high closure risk here. (Insight updated 11/22/17)
ETF.com Tradability Insight
Overall, on-screen liquidity in the segment leaves much to be desired. No fund is superbly liquid. IUSB comes closest to having real and sustained secondary liquidity.
“if liquidity is your primary concern, look to US investment grade” sufficient volume for most retail investors, but spreads are still relatively wide. So continue to use limit orders to control trading cost. For the other three funds, trade with caution, and limit orders are a must.
Due to the breadth of the coverages, institutions should work with market makers when executing large orders. The high-yield market (typically a smaller part of the portfolios) faces constant liquidity constraints. Large orders can impact prices of underlying securities.
Overall, if liquidity is your primary concern, look to US investment grade for better trading dynamics. (Insight updated 11/22/17)
ETF.com Fit Insight
Funds in the US Broad Market segment provide coverage of a wide array of fixed-income sectors, with varying credit quality and maturity exposures. Investors have to decide if they want to
“IUSB is the only 'vanilla' fund in the segment” stake their returns to passive exposure, active security selection or model-driven optimizations.
IUSB is the only “vanilla” fund in the segment. It tracks the same index, the Barclays US Universal Index, as our segment benchmark. It provides market-value-weighted exposure of the broad USD-denominated bond market. So it comes as no surprise that it is the best Fitting fund in our view. Depending on prevailing market conditions—bond issuances and redemptions—index and fund characteristics can evolve over time.
BYLD holds iShares bond ETFs as its building blocks. The fund uses a trailing volatility optimization model to select and weight 13 iShares ETFs. The goal is to maximize yield while having equal or less volatility than iShares’ AGG. As such, BYLD’s composition will evolve based on trailing performance of underlying funds.
INC is a quasi-active fund that aims to provide roughly equal credit and interest-rate-risk exposure. Despite its actively managed regulatory designation, INC follows a highly transparent rules-based methodology. Its portfolio reaches well into the high-yield space and, unlike other funds in the segment, INC doesn’t physically hold any Treasurys. In fact it currently has a hefty short position to reduce interest-rate risk. So for investors looking for a one-stop core bond fund that includes consistent, “long” exposure to Treasurys, INC probably isn’t a suitable product.
GMTB is the only true active fund in the segment. Its portfolio managers use a combination of macroeconomic forecast and fundamental security analysis to identify sectors and securities they believe will generate higher risk-adjusted returns.
Overall, investors will have to decide which style—active, optimized or vanilla—suits them the best. (Insight updated 11/22/17)