Guggenheim is closing an actively managed core bond fund that has fought an unsuccessful battle to compete for market share with some of the more successful fixed-income ETFs on the market. It’s been on ETF.com’s list of funds at a high risk of closure for some time.
The Guggenheim Enhanced Core Bond ETF (GIY | C-37) launched in February 2008 as an index fund with a different name and a different ticker that competed against two huge and well-established bond funds: the $15 billion iShares Core Total U.S. Bond Market (AGG | A-97) and the $19 billion Vanguard Total Bond Market (BND | A-96).
GIY was reborn in June 2011 as an active total return type fund that would end up being dominated in asset gathering by Bill Gross’ Pimco Total Return ETF (BOND | B). BOND came to market in March 2012—10 months after GIY’s rebirth—and quickly became the biggest active ETF and the second-most-successful ETF launch after the SPDR Gold Shares (GLD | A-100).
It's safe to say that BND and AGG’s continued dominance of the U.S. “aggregate” investment-grade bond fund market, as well as Bill Gross' star power, helped sealed the fate of the Guggenheim Enhanced Core Bond ETF (GIY | C-37) in both its iterations over the years.
The fund, which now has just $5 million in assets under management, is scheduled to close on March 7, according to a regulatory filing. As noted, BND and AGG have $19 billion and $15 billion in assets, respectively. For its part, Gross’ BOND now has $3.49 billion in assets and is currently the second-biggest active ETF on the market.
The demise of GIY speaks to the disadvantages of bringing ETFs to market relatively late to the game. Indeed, GIY launched in February 2008, while AGG and BND launched in 2003 and 2007, respectively. Vanguard was able to offset the disadvantages of bringing BND to market after AGG because it was much cheaper than AGG for a critical number of years.
But AGG now has an annual expense ratio of 8 basis points, or $8 per $10,000 invested, while BND’s expense ratio is 10 basis points. By contrast, GIY has a relatively high expense ratio of 27 basis points, or $27 per $10,000 invested—surely a reflection of the costs of running an active portfolio, and surely a disadvantage relative to AGG and BND.
Gross’ BOND has an annual expense ratio of 55 basis points, or $55 per $10,000 invested, suggesting that Gross’s star power had much to do with BOND’s success and with Guggenheim’s inability to leverage GIY’s first-to-market status.
Another factor that has probably hurt GIY is that the aggregate bond segment of the ETF world had outflows of $23 billion last year amid concern about how the Federal Reserve’s plan to “taper” its quantitative easing program would hurt bond holdings.
Gross’ BOND had 2013 outflows of $176 million, ending the year with $3.5 billion, compared with $3.8 billion at the end of 2012, according to data compiled by ETF.com.