A number of ETFs do canvass the global bond space, but what do they really hold?
Editor’s Note: This is the second part of a two-part series of blogs examining the available products canvassing the global bond universe.
If you look hard enough, there are a number of ETFs targeting the global bond space, but it’s worth looking more closely at what they hold, because they are different from one another.
I looked at the global bond space in my last blog, and addressed the issue of the lack of an investment-grade global bond ETF.
I took a narrow focus to identify a niche I was surprised hadn’t gotten filled by any issuer, all while more granular and esoteric strategies have come to market with some frequency.
However, expanding the scope of the inquiry to include any bond ETF with a global geographic reach—period—yielded several options that are available for investors, all of them actively managed strategies.
Within the IndexUniverse ETF Classification System (ECS), we have categorized four funds as having broad global geographic and economic exposures. They are:
- Pimco Total Return ETF (NYSEArca: BOND)
- AdvisorShares Madrona Global Bond ETF (NYSEArca: FWDB)
- Guggenheim Enhanced Core Bond ETF (NYSEArca: GIY)
- First Trust High Yield Long/Short ETF (NYSEArca: HYLS)
Before diving into each of these funds, it’s important to understand what we consider a U.S. bond and what qualifies as a global portfolio in the fixed-income universe according to IndexUniverse ECS.
Not all debt issued in dollars is issued by U.S.-based entities. However, currency denomination is historically the industry measuring stick for classifying bonds into various segments of the market. As such, that’s what we go with. It’s not perfect, but those issues are a topic for another day.
Taking that leap of faith, funds are classified based on their claims to fame.
In the case of most index-tracking funds, this means looking at the underlying index and determining the exposures it claims to deliver. For active funds, like the four listed above, it’s the scope of the investment universe the manager can choose from.
For fixed-income ETFs, this means that a fund that aims to beat a dollar-denominated, investment-grade index like the Barclays US Aggregate Bond Index, but can hold international securities, high yield debt, and bonds denominated in other currencies, is classified as a broad-based global fund.
While I understand this may go against the prevailing grain of thought for some, to me this intuitively makes sense. The parameters set in the fund prospectus serve as the bounds of the managers’ reach. At any time, the manager can make allocations to the maximum of those limits.
So how do these four funds stack up?
From a holding-cost perspective, the range is wide. Guggenheim’s GIY and Pimco’s BOND, at one end of the cost spectrum, charge 27 basis points and 55 basis points, respectively. Meanwhile, First Trust’s HYLS and AdvisorShares’ FWDB come in at a hefty 119 basis points and 126 basis points.
While the more expensive funds may very well outperform their cheaper counterparts, making up almost 70 to 100 bps annually is a tall order, especially in today’s low-interest-rate environment.
Trading costs are another major concern. BOND is the lone standout of the four, with significant volume and tight bid/ask spreads. It trades $60 million-plus on average and has spreads of 5 basis points.
The other funds’ volumes are paltry in comparison—less than $300,000 for the two funds combined changes hands most days, and average bid/ask spreads range from 53 basis points to 88 basis points. With such thin volumes, most trades are likely to either not get filled or cost even more than that.
Of the four, AdvisorShares’ FWDB has the broadest scope, reaching into almost every nook and cranny of the bond world.
The fund applies a fund-of-funds strategy, holding other ETFs that target 12 different debt sectors. At the moment, the fund is heavy on credit, with the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD) and the AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD) as its largest allocations. More than 20 percent of the assets are allocated to funds with an international focus, ranging from investment-grade sovereign debt to emerging market corporates.
Pimco’s BOND also takes advantage of its global purview by allocating a significant portion of its assets—about 9 percent—to Mexico, with some smaller allocations to some developed European countries and a smattering to emerging markets. High-yield bonds carry an allocation of 11 percent, with nonrated securities making up 21 percent of the assets.
Guggenheim’s GIY and FirstTrust’s HYLS currently stay exclusively within the domain of USD-denominated debt.
GIY keeps its allocations to investment-grade debt exclusively. Its 29 holdings are allocated to U.S. governments (22 percent), mortgages (57 percent), and corporate debt (21 percent). HYLS comes from the other end of the credit spectrum and goes long high-yield debt (126 percent) and short Treasurys (26 percent).
The knee-jerk reaction may be: “What’s global about GIY and HYLS?” For now, not a whole lot.
But as active strategies, they can max out the permitted allocations to international debt without any notice.
Unlikely? Maybe. But not impossible.
As such, comparing the funds to a benchmark that does not allow for these flexibilities is like comparing apples and oranges. Just because both are fruit doesn’t mean it’s a viable comparison.
At the time this article was written, the author held no positions in the securities mentioned. Contact Gene Koyfman at [email protected].