Gundlach, SSgA Team For New Bond ETF

June 02, 2014

The new active bond fund, currently in registration, will go head-to-head with Pimco’s BOND.

Jeff Gundlach, founder of Los Angeles-based DoubleLine Capital, has joined forces with State Street Global Advisors to bring to market an actively managed bond ETF that would go head-to-head with Bill Gross’ Pimco Total Return ETF (BOND | B). The fund, currently in registration, marks Gundlach’s first foray into the ETF market.

The SPDR DoubleLine Total Return Tactical ETF will invest in just about every type of debt security, including investment-grade and junk debt—both sovereign and corporate—from issuers around the globe, according to the prospectus submitted to regulators late last week.

The new ETF would join a growing number of actively managed fixed-income ETFs that look to capitalize on the pricing inefficiencies of the bond market with the help of a hands-on manager. That approach has so far worked well for a fund like BOND—the undisputed leader in the segment of broad-based active bond ETFs that are global in scope. It now boasts $3.4 billion in assets under management, and a track record of outperformance relative to passive counterparts.

Part of BOND’s resonance with investors is tied to the star power of Bill Gross himself, who manages the fund. Much like BOND, State Street’s new ETF would count on Gundlach’s footprint, which includes time as head of the multibillion-dollar TCW Total Return Bond Fund—a post he held until 2009, and where he earned a reputation for being one of the top managers in the space. DoubleLine, the firm he founded, oversees some $50 billion today.

By design, BOND sets out to maintain a duration that is within two years of that of the Barclays U.S. Aggregate Bond Index—the same benchmark underlying the behemoth $17 billion iShares Core Total U.S. Bond Market ETF (AGG | A-97).

Year-to-date, BOND has outperformed AGG, as seen in the chart below, even as investors yanked roughly $244 million in net assets from the fund since Jan. 1. AGG, meanwhile, gathered more than $1.41 billion in net new assets in the same period. It’s worth pointing out that the outperformance in total returns has come despite its price tag, which is roughly seven times more than the 0.08 percent AGG charges in expense ratio, or $8 per $10,000 invested.

BOND_AGG_YTD_Perf

 

Since inception in March 2012, BOND has delivered even more notable outsized returns relative to AGG—as in 10 percentage points more over a two-plus year period. The chart below shows that return dispersion between the two funds since March 2012.

BOND_AGG_2-Yr-Perf

Charts courtesy of StockCharts.com

The SPDR DoubleLine Total Return Tactical ETF would be part of a “master feeder” structure, in which the fund invests most of its assets in a corresponding “master fund.” That master fund is a separate mutual fund that has an investment objective, investment policies and risks substantially identical to the ETF, according to the prospectus.

The manager may invest up to 25 percent of the portfolio in nonagency mortgage-backed securities, and 25 percent in high-yield bonds, according to the filing. As much as 15 percent of the portfolio may be invested in locally denominated foreign debt. The overall mix sets out to have a weighted-average effective duration of one to eight years, in an effort to mitigate exposure to interest-rate risk, the filing said.

These investment guidelines aren’t all that different from BOND’s, which invests up to 10 percent of the portfolio in high-yield bonds, up to 10 percent in preferred and convertible instruments, and up to 30 percent in locally denominated foreign debt, according to ETF.com Analytics.

BOND’s effective duration is currently 5.14 years. The longer-dated the portfolio, the more sensitive it is to interest-rate risk.

State Street already offers two active bond ETFs, one of which—the SPDR Blackstone / GSO Senior Loan ETF (SRLN | B) has done a great job attracting investor interest. Launched just a year ago, SRLN already has more than $600 million in assets under management.

 

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