Daily ETF Watch: A Go-Anywhere Bond Fund

WisdomTree plans to market an unconstrained bond ETF.

Reviewed by: Heather Bell
Edited by: Heather Bell

WisdomTree looks to be striking out into new territory with its latest filing—a “go anywhere” actively managed bond fund. The WisdomTree Unconstrained Bond Fund’s filing is remarkable mainly because of the sweeping nature of its scope and because it lies so far outside the normal purview of the ETF provider, which is best known for its dividend- and earnings-weighted weighted funds.


Unconstrained bond funds are generating interest in this low-interest-rate environment given they allow their managers to seek out yield wherever it can be found and to adjust their duration at will. Certainly much was made of the announcement that Bill Gross would be leaving Pimco to manage an unconstrained bond fund for Janus in late September 2014.


This go-anywhere approach to bond funds is something that managers of index funds or more targeted actively managed bond funds are generally prevented from doing.


In spite of the hype, Investment News ran an article earlier this month that noted Morningstar’s nontraditional bond category—which includes unconstrained and absolute return strategies—was lagging the Barclays Aggregate Bond index by a few percentage points. Keeping in mind that actively managed funds generally come with a noticeably higher price tag than index funds, the implication appears to be that investors would have been better off in a broad-based bond index fund, regardless of the low-interest-rate environment.


WisdomTree has never shied away from delving into new territory, and the firm has certainly found some of its gambles to be quite successful. Adding a currency hedge in 2010 to the previously unhedged and largely unremarked-upon WisdomTree Hedged Japan Equity Fund (DXJ | B-65) set the stage for it to become an $11 billion powerhouse and kicked off a growing trend of currency-hedged equity ETFs within the market.


Filing Details

For someone familiar with fund filings, the WisdomTree filing is almost comical. For example, in its explanation of the principal investment strategies of the fund, it simply states “Under normal circumstances, the Fund will invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in Debt.”


Yep, you read that right—just “Debt.”


The section then goes on to explain just exactly how unconstrained this bond fund will be in terms of geography, category, maturity, denomination and rating. There are limitations on how much it can put into any single type of debt investment, such as no more than 10 percent in any single corporate issuer and no more than 50 percent in emerging markets, but it looks like almost anything is fair game for the ETF’s purposes. The fund can also invest up to 35 percent of its assets in derivatives.


It seeks to target an average effective duration between negative five years and (positive) 10 years, according to its prospectus, with the ability to take the fund into negative-duration territory in an environment of rising interest rates. However, it is free to move outside the stated duration range if it needs to.


The filing did not include a ticker or expense ratio, and it did not indicate on which exchange the fund would have its primary listing.

Heather Bell is a former managing editor of etf.com. She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.