The ETF industry has witnessed a number of innovations across the asset classes lately. The recent proposal by Cambria ETF Trust to issue a fund in the global fixed income space in conjunction with a currency hedge is one such novel product that could be coming soon.
Cambria has already made waves in the yield space with a successful launch of Shareholder Yield ETF (SYLD) early this year and several other products filed for approval.
Cambria is looking to put out more in the yield space in a move to quench investors' thirst for higher yields abroad in the fixed income space so as to move away from a very low interest rate prevailing in the U.S. and to capture exposure in the forex market.
Proposed fund in focus
As per the recent SEC filing, Cambria’s new fund, the Global Income and Currency Strategies ETF, will look to trade under the ticker symbol of FXFX. The fund will seek to invest in securities with exposure in the global currency and bond markets.
These investable securities will be forward foreign currency contracts, global currencies and ETPs, U.S. dollar and non-U.S. dollar denominated sovereign and corporate debt securities, ETFs focused on money market instruments and so on.
The Fund possibly will give up to 20% of its exposure to U.S.-dollar denominated and non-U.S.-dollar denominated junk bonds (see all the Junk Bond ETFs here).
FXFX will mainly cover currencies of developed countries that, as per Cambria, have liquid currency markets. The fund will deploy the quantitative algorithm used in order to select long and short currency exposures for the Fund.
The product is actively managed and looks to manage the pool of assets on a daily basis. The fund looks to charge investors 79 basis points a year in fees for exposure. An actively managed nature and the consequent high portfolio turnover have led to such a pricey expense ratio.
How does it fit in a portfolio?
Investors looking for a broad income play could look to this fund if it ever hits the market. The new product seems to be an enticing choice for investors owing to the rock-bottom interest rate scenario currently prevailing in the U.S. which has forced investors to look for regular current income (see High Dividend ETFs to Buy Even If The Fed Tapers).
Also, investors who are in search of a safe haven and cannot withstand much credit risk might prefer the product as FXFX holds mainly high investment grade corporate as well as sovereign bonds, thus with minimal probability of default. Its allocation toward junk bonds is minimal.
The novelty of the fund is the cushion against negative currency translation along with providing investors with an elevated level of current income.
Can it succeed?
While there are only a few multi-currency actively managed bond funds, FXFX could face competition from PIMCO Foreign Currency Strategy ETF (FORX). FORX so far has gathered an asset base of $25.7 million. FORX charges 65 bps in fees per year.
However, FORX has more similarity with FXFX. Like the proposed fund, FORX is also an actively managed fund seeking to invest not only in currencies, but in forwards and fixed income securities denominated in foreign nations as well.
The short-term debt securities of various countries comprising FORX have a residual maturity between 1 and 3 years and high investment grade (read: PIMCO Debuts Active Currency ETF (FORX).
Given this, the proposed fund, if ever approved, should highlight its high yield focus so as to gain market share. With Cambria’s rich experience in dealing with high-yielding products, it would not be difficult for the new bond ETF with currency hedge to garner considerable inflows, should it eventually pass regulatory hurdles.
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