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TOTL Return: For Retirement Income

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About: SSGA Active Trust - SPDR DoubleLine Total Return Tactical ETF (TOTL), Includes: AGG, BND, DBLTX, EMB, HYG
by: Josh Ortner
Summary

The SPDR Doubleline Total Return Tactical ETF provides investors professional money management with a total return focus.

TOTL yields an effective 3.55% currently.

The TOTL ETF aims to outperform by exploiting mispriced areas of the bond market.

This week, I spoke with a Seeking Alpha reader who was looking for more income options in retirement. As yields have dropped again this year, more investors are becoming impatient in trying to find alternatives to equities and rightfully so. One ETF I stumbled upon when trying to look for a cheaper alternative to one of my favorite bond funds (DBLTX), is the SPDR Doubleline Total Return ETF (TOTL). Managed by Jeffery Gundlach's Doubleline team, this ETF is one of the better actively managed bond funds in existence today. The SPDR Doubleline Total Return Tactical ETF seeks to maximize total return for bond investors, and not just focus on yield like many products do today. I would like the current retiree to learn from this article why TOTL is a good fund to add to your fixed income portfolio today.

It's About TOTL Return

One of the least talked about subjects here on Seeking Alpha is total return. I don't want to get on another subject here, but if you take away any key point from my fixed income articles on Seeking Alpha, please let it be the focus on total return. When looking for bond investments to purchase in retirement, make sure you take a look at the bond funds total return profile and not just the posted distribution yield. Let's take a look below at a simple chart of TOTL's recent total return brought to us by YCharts:

Chart Data by YCharts

(Source: YCharts)

As you can see from the above chart, if an investor were to just look at price for example, you would not see that this bond fund has returned investors 14.15% over the past four years. TOTL is able to provide solid returns by combining traditional and non-traditional fixed income asset classes with the goal of maximizing total return over a full market cycle through active sector allocation and security selection. In an investment world were passive ETF's are king, it's a great alternative to add active investment management to the mix.

TOTL Is Producing Better Risk-Adjusted Returns

Any of you who have been following my bond fund analysis knows I am a big proponent of investing in passive aggregate bond funds like (AGG). However, there is just a couple actively managed funds I like such as TOTL, due to its management team to in their professional ability in managing risk. TOTL attempts to outperform its bond aggregate benchmark, in part by exploiting mispriced areas of the bond market while also including asset classes not included in the index such as high yield bonds and emerging markets debt. Please know, this is not a fund to park all of your fixed income assets, but a fund with a great track record of providing alpha to bond investors in a low interest rate environment. Let's take a look below at a few key risk metrics that is making TOTL worthy of some of your savings:

Metric TOTL
Arithmetic Mean (monthly) 0.30%
Arithmetic Mean (annualized) 3.66%
Geometric Mean (monthly) 0.30%
Geometric Mean (annualized) 3.63%
Volatility (monthly) 0.70%
Volatility (annualized) 2.44%
Downside Deviation (monthly) 0.37%
Max. Drawdown -2.50%
US Market Correlation -0.12
Beta(*) -0.02
Alpha (annualized) 3.90%
R2 1.47%
Sharpe Ratio 1.00
Sortino Ratio 1.69
Treynor Ratio (%) -99.87
Calmar Ratio 1.06
Active Return -8.71%
Tracking Error 12.79%
Information Ratio -0.68
Skewness -0.46
Excess Kurtosis 0.91
Historical Value-at-Risk (5%) -0.91%
Analytical Value-at-Risk (5%) -0.86%
Conditional Value-at-Risk (5%) -1.43%
Upside Capture Ratio (%) 9.26
Downside Capture Ratio (%) -12.70
Safe Withdrawal Rate 33.85%
Perpetual Withdrawal Rate 1.74%
Positive Periods 31 out of 45 (68.89%)
Gain/Loss Ratio 1.33

(Source: Portfolio Visualizer)

The first risk management measure an investor needs to note is the negative beta figure. Any modern portfolio needs funds that provide a negative correlation to equity markets like TOTL does. The fund has a -.12 market correlation figure to broad markets. If you are willing to experience a 2.44% annualized volatility in your fixed income portfolio, TOTL will yield you roughly 3.5% as of today. This is a fine way to produce some income while not experiencing much price risk. With a roughly 70% positive period rate, TOTL can provide consistent monthly dividends as well to retired investors, which they need to live off of.

How Does TOTL Stack Up Against Its Benchmark?

In the beginning of this article, I talked about my approval for investors to purchase aggregate passive funds like (AGG) or Vanguards (BND). However, sometimes active managers do beat these benchmarks. Let's take a look below at a YChart that will illustrate us TOTL's return vs. AGG and the current yields of these funds:

Chart Data by YCharts

(Source: YCharts)

We can see that passive management is beating out my favorite active fixed income manager here. However, remember one key point I discussed a little bit earlier in how TOTL is actually providing a better risk-adjusted return. Since TOTL's inception in 2015, its max-drawdown was only -2.5% vs. the AGG's max-drawdown of -3.52%. It's hard to see from the above chart, but the drawdowns are indeed lower than that of AGG. This is the biggest reason for an investor to buy into a fund like TOTL, is the way an active manager can provide less drawdowns and a better total return profile.

Chart Data by YCharts

(Source: YCharts)

Another attractive element for TOTL is its current distribution yield of roughly 3.4%. This yield is indeed 70 basis points more than AGG, while investors are taking less volatility risk. I only look at yields in these funds after I look at how much price volatility they are experiencing. In this case, TOTL looks great yielding 340 basis points while experiencing only 250 basis points in price volatility. These are the type of figures you want to see in producing alpha in your fixed income portfolio.

Going Forward With TOTL

TOTL does a great job of selling itself vs. its competitors. With its largest holdings in United States Treasuries and Mortgage Backed Securities, I believe TOTL is setting itself up for just as good of returns in the future. The current dividend yield of 3.5% is pretty attractive for a fund that only has a 4.5% exposure to high yield securities (HYG) and an 8% allocation to emerging market debt (EMB). TOTL provides actively managed core fixed income exposure benchmarked to the Bloomberg Barclays US Aggregate Bond Index. This is a great approach for fixed income investors to gain bond market exposure, while trusting one of the best bond managers of our time in Jeffery Gundlach. Of course there is a risk in trusting any active investment manager, but the make-up of TOTL is pretty tough to beat. Do yourself a favor and consider this ETF for total return in your fixed income holdings.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TOTL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: These are professional opinions of Mr. Josh Ortner, CTFA, and should not be construed as personal financial advice to your own situation.