Comparing Total Return Bond ETFs

This has been a big year for U.S. fixed-income ETFs, which have led asset-class net creations with inflows of more than $60 billion year-to-date. In this segment, no fund has been more popular this year, or is bigger than the iShares Core U.S. Aggregate Bond ETF (AGG).

AGG, which has a massive $41.3 billion in total assets, tracks an index of U.S. investment-grade bonds in a far-reaching portfolio that includes more than 5,800 securities.

So far this year, AGG has attracted $9.24 billion in net inflows—the second-most-popular ETF of 2016, behind only the SPDR Gold Trust (GLD), according to FactSet data.

Still, just as AGG is popular, so is the attempt to outperform it. There’s a growing number of funds that set out to do just that, and they, too, are growing in size, for the most part.

Consider five ETFs that strive to beat the AGG:

• SPDR DoubleLine Total Return Tactical ETF (TOTL)
• PIMCO Total Return Active ETF (BOND)
• Guggenheim Total Return Bond ETF (GTO)
• WisdomTree Barclays US Aggregate Bond Enhanced Yield Fund (AGGY)
• Fidelity Total Bond ETF (FBND)

There are quick differences we can point out between them: Four of these funds seek outperformance through active management—only AGGY is index-based.

When it comes to active management, having a “star” manager goes a long way in helping an ETF find acceptance among investors. It’s no surprise, then, that TOTL is the biggest fund in this group, with $2.8 billion in assets, thanks in part to the reputation of its manager, DoubleLine’s Jeffrey Gundlach.

BOND did, too, once benefit from a strong name behind it. The fund, which was originally managed by “bond king” Bill Gross, emerged as the second-most-successful ETF launch ever—the fund gathered its first $1 billion in about three months thanks in large part to Gross’ reputation.

But Gross has left PIMCO for Janus Capital, putting the fund in the capable hands of not one, but three, managers: Scott Mather, Mark Kiesel and Mihir Worah. Since Gross’ break with PIMCO, the ETF has struggled to attract many investors, although it remains the second-largest in this group, with $2.5 billion in assets.

More Active Management

GTO is also actively managed, and it brings into this space the name of Guggenheim’s Scott Minerd and his team. But the fund is still too new to market to challenge TOTL’s and BOND’s dominance, launching back in February. It only has $21 million in assets.

And FBND has Fidelity’s brand name behind it—it has accumulated $173 million in assets in about two years. Four of these funds have seen net positive asset flows this year—BOND is the only ETF in the red, with net redemptions of $116 million year-to-date.

Asset flows don’t say much about the viability of a fund, or about its importance. But the reality is that in a year when fixed income has been the most popular asset class for ETFs, BOND has bled assets. Three of these funds are still relatively new to market, having being launched less than two years ago.

To many investors and advisors, longevity in the market—and a live track record—matter when choosing an ETF, particularly an actively managed one. In this group, BOND is the veteran, with a 2012 inception.

FBND is nearing its second anniversary this October, but the other three are relative newbies, particularly GTO, which was launched only six months ago. TOTL was launched 18 months ago.

Portfolio differences among these five ETFs abound, and explain the divergence in their performances year-to-date. Plotting the total returns of these five ETFs so far in 2016, there’s nearly 4 percentage points between the best performer and the worst: 

These funds all set out to outperform AGG, but so far this year, three of them have accomplished that. The two largest funds in the group, TOTL and BOND, have both slightly underperformed—AGG is up 5.6% year-to-date: 

Charts courtesy of StockCharts.com

As a quick look under the hood, here are some of the major differences in portfolio construction:

TOTL

TOTL is the largest portfolio, with 654 holdings, and one that tilts heavily toward mortgage-backed securities—56% of the portfolio is allocated to MBS. That strong bet on mortgage-backed securities has in some ways been the trademark of Gundlach’s approach to this segment.

Treasurys here represent only 12% of the overall mix, according to State Street data. This allocation is a notable departure from the underlying benchmark for this segment, the Barclays U.S. Aggregate Bond Index, which holds Treasurys as its largest weighting at 36% and mortgage-backed securities at 27%.

TOTL is also global in scope, allocating about 8.3% to emerging market bonds. And it owns debt that’s not at the top of the quality spectrum, such as B- and C-rated bonds. The mix has a current 30-day yield of 2.75%—the second-highest among these five ETFs.

BOND

BOND, which has slightly fewer holdings than TOTL—585 securities—has a 30-day yield of 2.53%, or 20 basis points less than TOTL.

From an allocation perspective, BOND tilts toward U.S. government debt at about 51% of the portfolio. Mortgage-backed securities snag about 44% of the fund’s market value, according to PIMCO data. But like TOTL, BOND too invests in high-yield bonds and emerging market debt.

FBND

FBND is the third-largest portfolio of this group, with 465 holdings. The fund, which is shelling out a 30-day yield of 2.36%, focuses on corporate debt—about 40% of the mix—with government and mortgage-linked securities at 31% and 20%, respectively, according to Fidelity data.

Roughly 20% of FBND is tied to high-yield bonds, and the fund, too, is global in scope. U.S. debt accounts for 86% of the portfolio.

FBND is shelling out the second-lowest 30-day yield of the group—second only to AGGY—but it’s also delivering the strongest total returns year-to-date, with gains of 8.4% versus AGG’s 5.6%.

GTO

GTO is the smallest of these portfolios, with only 87 securities. Among them, U.S. Treasurys lead the allocation breakdown, with roughly a 24% weighting.

Cash and cash equivalents, as well as investment-grade corporates, are a close second, at about 15% each, according to Guggenheim data.

While the portfolio is relatively small, its reach is pretty wide from a quality perspective, including Treasurys, bank loans, munis, preferreds and high-yield corps.

As of Aug. 26, GTO had the highest 30-day yield of the group, at 2.95%.

AGGY

And then there’s the index-based AGGY, which tracks the Barclays U.S. Aggregate Enhanced Yield Index. AGGY has a current 30-day yield of 2.23%—the lowest of the group—but the fund is also the second-best performer among these five ETFs, with gains of 8.2% year-to-date, as the chart above shows.

AGGY only owns investment-grade debt that’s weighted by yield.

And within investment-grade bonds, AGGY tilts toward the higher-quality debt—roughly 48% of the portfolio is AAA-rated. And while global in scope, the fund allocates 91% to U.S. bonds. But its biggest segment allocation is to corporate bonds, which represent about 50% of the mix.

Mortgage-backed securities and Treasurys follow, at 27% and 16%, respectively.

These portfolio differences matter when choosing the right ETF for you. But it’s important to remember that four of these five funds are actively managed, meaning their portfolio managers can quickly—and drastically—change their allocations depending on their views.

Contact Cinthia Murphy at [email protected].