Today Hartford Funds is rolling out two investment-grade bond funds on the NYSE Arca exchange. The funds, the Hartford Corporate Bond ETF (HCOR) and the Hartford Quality Bond ETF (HQBD), are both actively managed and subadvised by institutional investment manager Wellington Management, which also subadvises a number of mutual funds for Hartford.
In fact, Hartford’s head of exchange-traded funds, Darek Wojnar, notes that its advisor customers who had switched to fee-only compensation still wanted to access similar strategies to the ones they had previously accessed via mutual funds, which was one of the reasons Hartford launched these two ETFs. The teams managing the ETFs also manage some of Hartford's mutual funds, and HQBD uses the same strategy as an existing fund but in an ETF wrapper.
“Clearly, Hartford Funds has a vast experience in delivering fixed income investments to investors through a mutual fund wrapper,” said Wojnar, who indicated that the new fixed-income ETFs were just the first of many anticipated active fixed-income and strategic-beta ETFs to come from Hartford. The firm already offers five multifactor equity ETFs with roughly $130 million in assets under management.
Wojnar characterized the two ETFs launching today as core bond offerings.
HCOR comes with an expense ratio of 0.44% and covers corporate investment-grade debt. The fund’s management team uses a bottom-up strategy to hone in on securities issued by firms with strong fundamentals and attractive total returns.
The prospectus notes that, although HCOR has no designated maturity range or sector restrictions, it will aim to achieve a dollar-weighted duration that falls within one year of that of the Bloomberg Barclays U.S. Corporate Bond Index. The benchmark had a duration of 7.19 years as of the end of 2016. Up to 20% of the fund’s portfolio may be invested in Treasurys or U.S. government debt securities.
The prospectus also says that the fund anticipates that the list of issuers covered in its portfolio will number 100 or fewer.
HQBD comes with an expense ratio of 0.39%. It has wider latitude than HCOR to invest in high-quality debt beyond the corporate segment. The prospectus note that it will likely have a significant allocation to agency and nonagency mortgage-backed securities and other mortgage-related debt. However, it may also invest in other forms of U.S. government debt such as Treasury obligations and agency debt, and in corporate and covered bonds. The fund can also make use of derivatives as well as repurchase transactions and agreements, among other investment vehicles.
HQBD’s dollar-weighted average duration will likely range from one to eight years, and the fund has no restrictions on its maturity, the prospectus said.
O’Shares Adds Int’l Developed Fund
O’Shares is adding broad developed-markets ETF to its lineup of “Quality Dividend” ETFs tracking FTSE Russell indexes. The firm has several smart-beta ETFs already trading that implement the same basic methodology and have combined total assets under management of roughly $450 million. The O'Shares FTSE Russell International Quality Dividend ETF (ONTL) is listed on the NYSE Arca and comes with an expense ratio of 0.48%.
ONTL tracks the International Target Index, which covers mainly large- and midcap stocks from developed markets other than the U.S. At the end of November 2016, the underlying index covered 462 securities ranging from $359.1 million to $207.1 billion in market capitalization.
As with the other O’Shares Quality Dividend ETFs, the fund’s underlying index targets companies exhibiting quality, low-volatility and yield characteristics.
“Quality is probably the most important factor that actually comes through in devising the portfolio. Yield is really kind of a byproduct of quality companies with good balance sheets,” said Kevin Beadles, O’Shares director of capital markets and strategic development.
The quality factor evaluates companies based on profitability and leverage, while the low-volatility factor relies on standard deviation of total returns and yield is based on 12-month trailing dividend yield. The methodology applies tilts to the individual securities based on their factor exposures. Individual components are capped at 5% of the index, the prospectus says.
O’Shares also has an emerging markets fund in the works as well as currency-hedged versions of both that and ONTL.
ETF Offers ‘Short Squeeze’ Strategy
The Active Alts Contrarian ETF (SQZZ) makes its debut today. The fund, managed by Brad Lamensdorf, the co-manager of the $171 million AdvisorShares Ranger Equity Bear ETF (HDGE) and founder of Active Alts, will invest in companies that its managers believe could be subject to a short squeeze.
SQZZ is listed on the Nasdaq exchange and comes with an expense ratio of 1.95%.
“We see this as a huge opportunity in an area of the market that really has not been tamed yet, meaning there’s still a tremendous amount of opportunity and alpha to generate,” Lamensdorf noted. According to him, the fund should be considered a liquid alternatives strategy.
A short squeeze occurs when a heavily shorted security sees an unexpected price increase, and those holding the short positions are motivated to exit them at a loss. According to the prospectus, short squeezes can be exacerbated when position holders seek to buy shares of the stock to cover their positions, further driving up the price.
Lamensdorf says that when brokers’ supply of a heavily shorted stock is running low, they will charge interest to loan out shares. He points out that Weight Watchers, one of the stocks in the fund, has been loaned out at an interest rate of 23%, while the stock of GoPro at one point was loaned out at an interest rate of 100%.
“We came to the determination that it’s really impossible to create a passive situation in this trade. It has to be done actively, and the reason it has to be done actively is that to capture the alpha from the interest when working with the banks, it’s not something that is so mechanical. It’s very active. The lending departments aren’t going to giving you really solid interest rates off of the lending if your rotation of your portfolio is too quick, meaning they need more stable borrows,” Lamensdorf said in reference to the fund’s active approach.
SQZZ’s strategy relies on intensive technical and fundamental analysis to identify companies that are likely to see a short squeeze due to a significant but unjustified level of short interest. Individual holdings are limited to 5% of their public float and 5% of the total portfolio. Holdings must have market capitalizations of at least $250 million. Additionally, the portfolio can be allocated entirely to cash if necessary, or fully vested.
The prospectus also notes that the fund will seek to generate additional income via securities lending and can loan up to one-third of its total assets. Unlike many ETFs that engage in the practice, securities lending is an integral part of SQZZ’s strategy.
Contact Heather Bell at [email protected].