More and more actively managed bond ETFs have come on the market in the last eighteen months. This article examines four of these ETFs representing four different bond categories: investment grade, ultra short-term, high yield and global bond. The focus will be on the fees charged by these funds, with brief information on the managers, the holdings and returns.
PIMCO Total Return ETF (BOND): This core bond ETF, actively managed by PIMCO co-founder, Bill Gross, invests primarily in investment-grade debt securities. Its duration normally varies within two years (plus or minus) of the benchmark Barclays Capital U.S. Aggregate Index. The fund's current 993 holdings include multiple fixed income sectors: 18% Treasurys, 30% Mortgage, 5% High Yield Credit, and 8% Municipal.
Inception Date: February 2012. Expense ratio: 0.55%. YTD Return: 1.86%. 1-Year Return: 10.50%.
Manager: Bill Gross oversees the management of more than $1.9 trillion of securities, including the seasoned sibling of this fund, the Pimco Total Return Bond Fund. Named Fixed Income Manager of the Decade for 2000-2009 and Fixed Income Manager of the Year for 1998, 2000, and 2007, he has 43 years of investment experience. He holds an MBA from the Anderson School of Management, University of California at Los Angeles.
PIMCO Enhanced Short Maturity ETF (MINT): This core-fixed income ETF primarily invests in short duration investment-grade debt securities, with the average portfolio duration not normally exceeding one year. It is designed as an appropriate option for non-immediate cash allocations. The fund's total of 673 holdings cover a wide swath of fixed income areas, including 53% Investment Grade Credit, 12% Government-Related, 17% Mortgage, and 2% Emerging Markets. Geographical distribution of holdings currently tally at 55.97% United States, with the remainder in foreign debt.
Inception Date: November 2009. Expense ratio: 0.35%. YTD Return: 0.29%. 1-Year Return: 1.39%.
Manager: Jerome M. Schneider, prior to joining PIMCO in 2008, was a senior managing director with Bear Stearns. While at Bear Stearns, he specialized in credit and mortgage-related funding transactions and helped develop one of the first "repo" conduit financing companies. He has 17 years of investment experience and holds an MBA from the Stern School of Business at New York University.
Peritus High Yield ETF (HYLD): The ETF offers a high current-income portfolio of corporate bonds, focusing on the non-investment grade market. It currently has a total of 65 holdings, with 21% of its assets in the top ten holdings. Duration is 3.40%. Current holdings listed on Morningstar show 100% now in corporate bonds.
Inception Date: November 2010. Expense ratio: 1.35%. YTD Return: 5.37%. 1-Year Return: 13.54%.
Co-Managers: The fund is offered through AdvisorShares and co-managed by Timothy Gramatovich, Chief Investment Officer, and Ronald Heller, CEO & Senior Portfolio Manager, Peritus Asset Management, LLC.
Timothy Gramatovich, prior to co-founding Peritus, was a Portfolio Manager with Smith Barney's Asset Management Division in Los Angeles, where he managed high yield portfolios for high networth individuals and institutions. He is a graduate of the New York Institute of Finance and began his career with Drexel Burnham Lambert in 1984, assisting in the development and marketing of high yield corporate debt management products.
Ronald Heller began his career in finance in 1993 with Smith Barney. Prior to Mr. Heller's investment career, he had a seven year career in the National Football League with San Francisco, Atlanta and Seattle, retiring in 1993. Mr. Heller attended Oregon State University majoring in Kinesiology.
Madrona Global Bond ETF (FWDB): This ETF, also offered through AdvisorShares, includes a diversified portfolio of fixed income products, including but not limited to, exchange-traded notes (ETNs), exchange-traded currency trusts and exchange-traded commodity pools. The fund invests in at least 12 distinct global bond classes constructed using a weighted allocation system based on historic yield curve analysis and a mean reversion strategy. The fund currently has 19 holdings with the top five and their percentage of total portfolio being:
- iShares iBoxx $ Investment Grade Corporate Bond (LQD) 17.95%
- Vanguard Mortgage-Backed Securities ETF (VMBS) 11.89%
- Peritus High Yield ETF (HYLD) 8.11%
- PowerShares Financial Preferred (PGF) 6.87%
- PowerShares Emerging Markets Sovereign Debt (PCY) 6.70%
Inception Date: June 2011. Expense ratio: 0.95%. YTD Return: 0.90%. 1-Year Return: 5.53%.
Co-Managers: The fund is sub-advised by Madrona Funds, LLC (Portfolio Manager) with three co-managers. Madrona was founded in 2010.
Brian K. Evans, Founder/Managing Member/Portfolio Manager, is also President and owner of Bauer Evans, Inc. and has been a CPA for 24 years. Bauer Evans is one of the largest certified public accounting firms in Snohomish County, WA.
Robert W. Bauer, CPA, is responsible for the implementation and development of investment strategies for Madrona Funds, LLC. He attended the University of Washington and received a BA in Political Science. Bauer started his own CPA firm, which later became Bauer Evans. He also holds his Series 65 license as an investment adviser representative for BondStreet.
Kristi R. Henderson, CPA/PFS, graduated with honors in June, 2007 from the University of Oregon with a degree in accounting. She holds her Series 65 license as an investment advisor representative for BondStreet.
BOND is very much worth its expense ratio of 0.55% compared to its mutual fund version, PIMCO Total Return Institutional Fund (PTTRX) which charges 0.46% and requires a minimum purchase of $1 million. This minimum purchase is reduced by some companies, such as Fidelity Investments ($100,000.00 required) and Vanguard ($25,000.00 required). One could go so far as to call BOND an absolutely fantastic deal. Since its launch in February 2012, it has prospered with a 1-year return of 10.50%. And while this 0.55% ratio exceeds its passive index bond counterparts, with this fee the investor is buying a noted manager's lifetime of expertise and the extensive research power within PIMCO Investments.
MINT's ultra-short parameters don't offer it many options to increase yield. And while its 0.35% expense ratio is not unreasonable, in this low-yield market the fee equals a major portion of the fund's total yield. Looking at its recent 1-Year return of 1.39%, many investors may prefer to take on more risk with other ETF offerings or put their cash in a money market account. Slightly more attractive, but not by much, is the Guggenheim Enhanced Short Duration Bond (GSY) with a 1-Year Return of 1.73% and an expense ratio of 0.27%.
HYLD has turned in an impressive 13.54% 1-Year Return and topped that with a YTD Return of 5.37%. This fund has done remarkably well since its launch in November 2010.
HYLD appears overpriced if you compare its 1.35% expense ratio with several managed mutual funds with long track records. For example, T. Rowe Price High Yield (PRHYX), with a 1-Year Return of 13.90% and a YTD Return of 4.55%, charges a 0.75% expense ratio and its successful manager, Mark J. Vaselkiv, has been onboard since 1996.
Another is the more recently launched PIMCO High Yield Spectrum (PHSDX) with a 1-Year Return of 15.25% and a YTD Return of 3.77%. Expense ratio is 0.90%. Its manager is Andrew Jessop, who has also been managing PIMCO's High Yield Bond Fund (PHYDX) since 2010 and before that served as the co-head of the high yield group at Goldman Sachs.
The expense ratio aside, HYLD has turned in a excellent, though brief, record.
FWDB has a 0.95% expense ratio. This expense ratio is not excessive for an actively managed global bond fund. However, because this is an ETF of ETFs, the investor is also paying acquired fund fees on top of that 0.95% expense charge. FWDB expenses can only be described as high.
There is also a larger issue. Are FWDB's holdings on target as far as the global fixed income universe is currently defined?
The Morningstar category average of U.S. holdings in a World Bond fund is 28.95%. The Madrona Global Bond ETF has 65.09% of its bond holdings in U.S. bonds. Three of its top five holdings, LQD, VMBS, and HYLD and are all U.S.-focused funds.
There are various interpretations of what "global" means today, but for many investors the Madrona Global Bond ETF may be too U.S.-centric.
Actively Managed ETFs: Actively managed ETFs are a very welcome option these days for investors. But the trend offers a few bumps in the road. "Actively managed" can be good and also not so good for returns. That's why passive indexing is so popular. Moreover, these actively managed products can come with expense ratios well above similar managed mutual fund offerings with lengthy track records.