Disappointing macroeconomic data, global market turbulence, and threats to the stability of the U.S. economy have been making headlines since the beginning of the year, leading to volatility across all asset classes. Meanwhile, treasury yields are also showing a downtrend.
Although the Federal Reserve Chair Janet Yellen stated earlier this month that the U.S. economy was making progress, she remained silent on the timing of the impending interest-rate hike. This coupled with shockingly downbeat job data for the month of May has led to speculations that a June rate hike is in all possibility off the table.
Because of these factors, fixed income bond ETFs have lately gained a lot of popularity as investors continue to search for stable yield in an ultralow rate interest environment.
So, it's not surprising that State Street Global Advisors has teamed up with Dorsey, Wright & Associates and has launched a fund of funds, which allows investors an opportunity to take advantage of a proprietary signal-driven, momentum-focused technical index methodology for fixed income exposure.
Below, we have highlighted the newly launched fund - the SPDR Dorsey Wright Fixed Income Allocation ETF (NASDAQ:DWFI) - in greater detail.
DWFI in Focus
The fund tracks the Dorsey Wright Fixed Income Allocation Index, which provides exposure to four SPDR ETFs with highest potential to outperform the other ETFs in the SPDR universe. Each SPDR ETF is selected on the basis of relative strength and the four top-ranked SPDR ETFs are included in the Index. Relative strength is measured through the comparison of price momentum based on historical daily closing prices inclusive of dividends since inception.
The product holds 4 ETFs in its basket, with approximately one-fourth of the weight each:
- SPDR Barclays International Treasury Bond ETF (NYSEARCA:BWX)
- SPDR Barclays Emerging Markets Local Bond ETF (NYSEARCA:EBND)
- SPDR Wells Fargo Preferred Stock ETF (NYSEARCA:PSK)
- SPDR Nuveen Barclays Municipal Bond ETF (NYSEARCA:TFI)
The fund has an expense ratio of 0.60%. The fund invests in the above-mentioned ETFs in slightly different weights than the index, gaining 25.35% exposure to International Treasury, 25.33% exposure to Emerging Markets, 24.63% exposure to Hybrids, and 24.56% exposure to Municipal Bonds.
Launched on June 1, 2016, the fund has already amassed $5.1 million in its asset base as per ETF.com. The fund is up 1.6% in the last 5 days.
How Could it Fit in a Portfolio?
With the low-yield environment likely to stay for some time now, investors are looking for stable income with low risk. DWFI provides investors a convenient and cost-effective method to track changes in price, volatility, rates, and yield spreads of certain fixed income ETFs through its relative strength methodology. Meanwhile, the fund of funds promises to be liquid and tax-efficient.
However, investors looking for a high-growth vehicle may not be satisfied with this product. Additionally, changes in currency exchange rates may affect the value of the fund's investment adversely.
Being a fund of funds with unique relative strength selection methodology, the ETF does not have any direct competitor. The fund provides investors a new way to play the fixed income market. The product charges moderately high fees from investors annually due to its unique strategy. The fund provides access to several niche spaces of the fixed income space - international treasury, emerging markets, preferred stock, and municipal bonds.
However, there are quite a few total bond market ETFs which could give some competition to DWFI. Of these, the popular fund, Vanguard Total Bond Market ETF (NYSEARCA:BND), has a total asset base of $30.7 billion. This fund tracks the Barclays U.S. Aggregate Float Adjusted Index and trades in heavy volume of 2.1 million shares per day and charges 6 bps in annual fees.
Apart from these, SOVB could also face competition from international high yield bond funds - the Schwab U.S. Aggregate Bond ETF (NYSEARCA:SCHZ) with an asset base of $2.9 billion, the SPDR DoubleLine Total Return Tactical ETF (NYSEARCA:TOTL) with AUM of $2.5 billion and the Fidelity Total Bond ETF (NYSEARCA:FBND) with AUM of $138.8 million.
Thus, DWFI is already off to a good start and has a good chance of making a name for itself if it manages to generate returns net of fees greater than the passively managed products in the bond ETF space. The ETF's plan of diversifying its exposure and its emphasis on liquidity are noteworthy, but its success is a huge factor of the returns it manages to generate.
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