Active Core Bond ETF Launches

October 04, 2018

Today Legg Mason launched its first fixed-income ETF and the 12th fund in its lineup. The Western Asset Total Return ETF (WBND) is actively managed and designed to be a core holding.

WBND comes with an expense ratio of 0.45% and lists on the Nasdaq exchange.

“Right now we’re in a lower rate environment, and that makes it difficult for investors to meet their income needs,” said Ambar Bajaj, vice president and ETF product manager at Legg Mason. He notes that an active management approach provides the ability to actively manage duration; the opportunity for better diversification given that the Barclays Aggregate Index is roughly 40% government debt; and better ability to address the problem of volatility.

The fund’s subadvisor, Western Asset Management Company, is an affiliate of Legg Mason known for its fixed-income expertise. WBND can invest in a wide range of fixed-income securities as well as derivatives. The fund is expected to have an effective duration of two to nine years, according to its prospectus.

Freedom With Caveats

Although it has a lot of latitude with regard to where it can invest, WBND does have a number of restrictions on that freedom. For example, asset-backed securities, privately issued mortgage-backed securities and similar debt securities are limited to 20% of the portfolio, while collateralized debt obligations and junior loans are limited to 10% and 20% of the portfolio, respectively. Up to 30% of the portfolio can be invested in high-yield debt. Non-U.S. issuers are limited to 30% of the portfolio, and debt denominated in non-U.S. currencies is limited to 25%, the document says.

Bajaj notes that most core bond strategies focus on the investment-grade space, and that WBND’s approach allows it to go beyond that, but within strict guidelines.

According to the prospectus, WBND is managed via both top-down and bottom-up analysis that takes into consideration macroeconomic factors to identify overarching trends while analyzing fundamentals at the individual security level.

“What you have with this offering is a way to access core fixed-income expertise in an ETF at a very competitive price point,” said Bajaj. “It’s a low-cost solution to gaining broad-based active core fixed-income exposure.”

Contact Heather Bell at [email protected]

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