Daily ETF Watch: New Active Bond Fund

New active iShares bond fund will seek to balance interest-rate and credit risk.

Reviewed by: Heather Bell
Edited by: Heather Bell

BlackRock’s iShares unit is set to launch an actively managed bond ETF on Thursday, Feb. 26 that will seek a balance between credit and interest-rate risk using quantitative analysis. That’s certainly a challenge in the current low-rate environment driven by easy-money policies around the developed world.


The investment argument for the iShares U.S. Fixed Income Balanced Risk ETF (INC) is based on the premise that the cap-weighted Barclays U.S. Aggregate Bond Index is burdened with an inappropriate amount of interest-rate risk.


Assessing the Barclays Agg, iShares reckons the benchmark can be characterized as roughly 90 percent interest-rate risk and 10 percent credit risk. But with INC, iShares will target a risk distribution that is 50 percent credit risk and 50 percent interest-rate risk.


According to iShares, the interest-rate risk associated with the Barclays Agg is primarily rooted in its allocation to Treasurys, which is currently more than one-third of its total market capitalization. INC can take a short position in Treasurys via futures and swaps.


However, there is one key difference from the Aggregate Bond Index in terms of coverage, as INC can invest “without limitation” in high-yield bonds, while the Aggregate is strictly investment-grade.


The fund is slated to launch on the BATS exchange. It comes with a net expense ratio after fee waivers of 0.25 percent, or $25 for each $10,000 invested, according to the fund’s latest prospectus.


First Tuttle Fund Launches
The Tuttle Tactical Management U.S. Core ETF (TUTT) began trading today. The fund is actively managed and invests mainly in other ETFs via four core strategies.


Tuttle Tactical Management is the fund’s subadvisor and has issued TUTT via the exemptive relief of ETF Issuer Solutions (ETFis). Tuttle’s overriding investment philosophy posits that trends tend to persist over intermediate-term, but that the short-term markets are choppy due to “media noise, fear and similar short-term disruptions and concerns,” according to the fund’s prospectus. Tuttle seeks to capitalize on those tendencies.


“The tactical nature of TUTT's objective is a pre-determined, active strategy that responds to market indicators rather than attempts to use them as predictors of market direction,” the press release said.


Depending on the market regime, the fund will utilize the following models to varying degrees: S&P 500 Absolute Momentum, Relative Strength Equity, Beta Opportunities and Short-Term S&P 500 Counter Trend.


The fund comes with a rather hefty expense ratio of 1.34 percent that puts it in the top five percent of ETFs in terms of pricing.


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.