Low Duration ETF Debuts

Today Hartford Funds rolled out an actively managed bond fund that targets dollar-weighted duration of less than three years. The Hartford Short Duration ETF (HSRT) is managed by Wellington Management Company, which looks to target securities that have attractive yield and total return.

HSRT comes with an expense ratio of 0.29% and lists on the Cboe BZX exchange. Cboe Global Markets is the parent company of ETF.com.

“Our clients are looking in their fixed-income solutions for both current income and long-term total return,” said Thomas McConnell, Hartford’s head of product innovation and implementation. “With interest rates rising, we see demand growing for lower-duration strategies, where you’re going to get that natural, more frequent reinvestment.”

“We feel strongly that an active strategy that allows for portfolio duration to be adjusted is an even more effective means by which to manage interest rate risk,” he added.

McConnell explains that duration essentially measures a security’s sensitivity to interest rates, such that when interest rates are rising, lower-duration securities will be less affected. He further notes that the portfolio’s current duration is in the vicinity of 1.6 years, which it achieves mainly by investing in short-maturity securities. Annual turnover for the fund is expected to be about 50%.

Scope

The primarily investment-grade fund can invest up to 35% of its portfolio in high-yield bonds and as much as 25% of its portfolio in securities issued by foreign issuers. Up to 35% of the portfolio may also be invested in bank loans; however, the prospectus specifically notes that high-yield bank loans fall under the limitations the fund places on high-yield debt as well.

Overall, the fund can also invest in U.S. government or agency debt; debt issued by U.S. and foreign corporations; asset- or mortgage-backed U.S. debt; foreign debt, including that issued by supranational entities; zero coupon securities; and fixed-income derivatives, which can be used to manage the fund’s interest rate risk and duration, the prospectus says.

One of the biggest competitors HSRT faces is the Janus Henderson Short Duration Income ETF (VNLA), which is also actively managed. The fund seeks to outperform the three-month Libor rate, and generally has a duration of two years or less. It has $437 million in assets under management, but comes with an expense ratio of 0.35%, 6 basis points more than what HSRT charges. VNLA has outperformed passively managed broad and short-term bond ETFs year-to-date.

Contact Heather Bell at [email protected]