As the equity ETF market becomes increasingly segmented, many ETF issuers are turning to fixed income securities as the next frontier of the exchange-traded fund world. This corner of the market has seen an incredible amount of innovation in the past few months as more issuers debut hyper-targeted fixed income funds and ones that zero in on more ‘exotic’ corners of the bond world.
WisdomTree, an ETF issuer based in New York, appears to be no exception to this trend as the company is looking to become a top competitor in the global bond market, despite having just five funds in the space.
Still, the company has seen great success with its billion dollar ELD which focuses on broad emerging market debt in local currencies and its $400 million ALD which has a focus on Asian debt in local currencies (also read 3 Actively Managed Bond ETFs for Stability & Income).
If that wasn’t enough, the firm also recently revealed plans for a new global corporate bond fund. While many details were not available in the initial SEC filing, such as expense ratio or ticker symbol, we have highlighted some of the key points from the document below:
This proposed ETF will focus on fixed income securities from any number of corporations be they public, private, or even state-owned or sponsored. The product looks to focus on developed markets, including American debt, although it can hold at least 25% of its portfolio in emerging market securities (see Go Local with Emerging Market Bond ETFs).
Investors should also know that the fund will include debt that is both denominated in American dollars as well as a host of non-U.S. currencies as well. However, a hedging strategy will be used to remove some of the currency risk in order to solely expose investors to the risk of the bonds and not currency fluctuations.
Lastly, it should also be noted that the product will be actively managed, and thus will not follow a benchmark, a factor which could lead to outperformance but also add to fees as well. According to the filing, the managers will use a ‘top down’ analysis of macroeconomic factors impacting the global fixed income market, and also a ‘bottom up’ analysis of countries and issuers, while only allowing 10% to go to any one security.
While the proposed ETF certainly sounds interesting, it could face some stiff competition from a number of issuers that are already in the space. Beyond the relatively new RAVI fund from FlexShares and the often overlooked Madrona Global Bond ETF (FWDB), there are a host of international bond funds that could pose as competitors (read FWDB: the Best Bond ETF You Have Never Heard Of).
Among these, IHY and PICB look to be especially fierce, particularly if these two can obtain a cost advantage over the proposed WisdomTree product. After all, these two both have at least $100 million in assets and neither charges more than 40 basis points a year in fees, likely making them cheaper than a similar fund that doesn’t follow an index (see Three Overlooked Active ETFs).
However, for those looking for potential active management outperformance and a truly global bet on corporate bonds—that includes the U.S.—the proposed product could be an interesting choice, suggesting that if WisdomTree can obtain the necessary regulatory approval it could have another winner on its hands with this fixed income ETF.
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