WisdomTree Investments has filed a preliminary prospectus for yet another actively-managed ETF as it builds on its successful Active ETF line-up. The latest filing is for a Global Real Return Fund will try to provide returns in excess of inflation over the long-term. Investment options that provide inflation protection are becoming increasingly in demand as many investors see the looming threat of inflation as a result of the unprecedented amounts of liquidity being pumped into the system by global central banks. Just this week, Russell Investments filed for its own actively-managed inflation ETF, called the Russell Inflation ETF (ONEI). PIMCO is another major player with a stake in this field as it also has an inflation-linked strategy in filing, called the PIMCO Global Advantage Inflation-Linked Bond Strategy Fund.
To achieve their strategy, WisdomTree fund managers will invest in fixed-income securities and other inflation-linked instruments both in developed and emerging markets around the world. Outside of the US, the fund will focus on investing in inflation-linked bonds from countries that are leading exporters of commodities – Australia, Canada, Brazil, South Africa and Chile. Presumably, the rationale behind this approach is that, in the face of inflation, commodities and other hard assets tend to appreciate thus benefiting countries that are leading exporters of commodities. Hence, all else equal, it would be a better idea to own bonds from these commodity exporting nations versus those of commodity importers who would have to pay up more for the inflated hard assets. The fund will also invest in US Treasury Inflation-Protected Securities (TIPS) which are bonds with principals and coupons that are adjusted upward in response to inflation rates.
It’s important to note thought that while inflation-linked securities provide protection from inflation risks, these securities, such as inflation-linked bonds, would still be exposed to changes in the real interest rate (ie. the nominal interest rate minus inflation). The fund is also allowed to make investments in derivatives such as inflation-linked swaps that provide exposure to inflation rates, while also being able to invest up to 10% of assets in non-investment grade securities.
Interestingly, to obtain the desired commodity exposure, the planned Active ETF will invest in a WisdomTree “subsidiary” organized in the Cayman Islands. While the fund itself cannot invest directly in commodities, that subsidiary can invest without limitation in commodity-linked derivatives such as commodity futures, swaps and structured notes. The fund’s investment in that subsidiary though will be limited to 25% of assets.
The fund will be managed by WisdomTree Asset Management but the fund’s ticker and expenses have not yet been disclosed. WisdomTree has seen strong success from its very first actively-managed bond ETF, the Emerging Markets Local Debt Fund (ELD) and already has four other bond ETFs under filing focusing on regional bond markets.
Disclosure: No positions in above-mentioned names.
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