Guggenheim Takes On TOTL, BOND

Guggenheim is launching today the Guggenheim Total Return Bond ETF (GTO), tapping into its deep fixed-income expertise to go head to head with Jeffrey Gundlach and PIMCO’s team in the active bond ETF space.

The fund, like Gundlach’s SPDR DoubleLine Total Return Tactical ETF (TOTL | C) and PIMCO’s PIMCO Total Return (BOND | B), will use the Barclays Aggregate Index as a guide for duration target and as the broad segment benchmark. However, it will pick its holdings based on a methodology that’s centered on behavioral finance—an approach to asset management in fixed income that’s pretty unique to Guggenheim. The core belief here is that investors value avoidance of loss more than they embrace alpha or outperformance.

“The way we build our portfolios is designed around this philosophical thought process, which is to pick up as much investment income as you can and make sure you don’t have losses,” said Anne Walsh, senior managing director and assistant chief investment officer for Guggenheim.

Different Looking Portfolios

“As a result, our portfolios look very different from benchmarks such as the Barclays Agg because the Agg is not designed to maximize your risk-adjusted total return opportunity,” Walsh said. “Our view is that there are a lot of other assets out there to be tapped into. In fact, there is about $37 trillion in the U.S. fixed-income market, and less than half of those securities are eligible for inclusion in the Barclays Agg.”

These assets include things like asset-backed securities, both commercial and corporate—no consumer paper, however—as well as bank loans, preferred securities and other corporate bonds, including high yield and municipal bonds.

The actual makeup of GTO’s portfolio will not be disclosed for another few days, as is often the case with new ETF launches, but we can take clues about its makeup from the firm’s mutual fund on which the ETF is based.

Mutual Fund Counterpart

The Guggenheim Total Return Bond Fund (GIBAX), with some $2.5 billion in assets, has relatively low interest rate sensitivity with duration that’s shorter than that of the Barclays Agg, and a 30-day yield of 5.22%.

Among the strategy’s top holdings are asset-backed securities—debt that’s typically backed by mortgages and other assets—comprising about a third of the portfolio. Corporate bonds and nonagency residential MBSs are also among the fund’s biggest allocations.

The mutual fund has a 0.84% expense ratio. The ETF wrapper costs 0.50%—slightly cheaper than both TOTL and BOND, both of which come with a 0.55% expense ratio.

Opportunity In Credit

Walsh, who—along with Scott Minerd, Jeffrey Abrams and James Michal—manages GTO, said that Guggenheim currently sees opportunity to pick up additional yield in spread products, “which have been widening in the last few weeks as we’ve seen the oil market, the China story and volatility in the stock market drive spreads wider, making it a really good time to buy into these segments that we feel will drive performance in the future.”

According to Walsh, the fixed-income market is revisiting what we saw happen in August 2011, when spreads widened significantly, particularly in the high-yield segment. Then, it turned out to be a great buying opportunity because fundamentals were good, she says. Now, that also seems to be the case.

That perspective, for the sake of comparison, is in stark contrast to that of Gundlach’s, who has steered clear of high-yield debt for some time.

Duration View

As for duration and views on interest rates, Walsh said Guggenheim Total Return strategies should continue to stay short the Agg duration target for the “foreseeable future,” especially with 10-year Treasurys yielding below 1.75%. An actual figure was not disclosed.

Still, that view is in line with competing TOTL and BOND, both of which have kept shorter duration than the Agg. TOTL, in this case, has had shorter duration than BOND and the Barclays Agg index since it came to market last year. Effective duration in TOTL, taking into account the fund’s cash position, is roughly 3.7 years. BOND has effective duration of about 4.5 years.

No Noteworthy Derivatives Use

Derivatives use should not be a trademark of GTO. For comparison, TOTL doesn’t rely on derivatives either, but BOND uses them heavily.

Guggenheim is a “cash bond buyer,” as Walsh puts it, meaning it doesn’t typically turn to derivatives when expressing its macro views. “We are not big derivatives users,” she said.

Contact Cinthia Murphy at [email protected].