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Belden: BulletShares Can Take On iShares

Olly Ludwig


It was only a matter of time before another ETF company decided to take on Guggenheim’s innovative “BulletShares” franchise of target-date maturity fixed-income bond funds. So, IndexUniverse.com’s Olly Ludwig caught up with Bill Belden, Guggenheim’s head of product development, to discuss iShares’ plans to launch its own target-date maturity fund lineup. The takeaway? Guggenheim is prepared to do whatever it takes to defend its BulletShares, including competing on price.


IU.com: Let’s start on a newsy note. iShares nipping at your heels in terms of putting its own version of your BulletShares target-date maturity corporate bond funds into registration. It’s hard not to notice that iShares noticed. So, what does the target-date bond space look like now? And with an entrant like iShares, it changes the perspective a little bit, no?

Belden: Sure. I would say first that imitation is the sincerest form of flattery, and I think we’ve been generating enough traction with our BulletShares product offering that competition can only be expected. And we certainly welcome competition. It makes us all better. And investor choice is always something that we welcome as well. But having said that, we’re going to make sure our value proposition is clearly defined and communicated to the marketplace, because we do believe that the BulletShares ETFs have offered value in the nearly three years we’ve been in the marketplace. They will continue to offer value in the volatile market environment in which we’re currently living, and certainly as we face more interest rate volatility, in particular, going forward.

IU.com: With rates perhaps starting to move upward, does the whole “laddering” suddenly look inviting?

Belden: The defined-maturity aspect of the BulletShares ETF is what’s really appealing in a volatile interest rate market. And while interest rates have been steadily low, it’s anyone’s guess as it relates to the pace by which they go higher, and when it actually starts happening. But it’s good to know that, if you're invested in a product like that, that has that defined maturity, that your interest rate sensitivity is really managed.

IU.com: Three of those BulletShares securities have successfully matured and closed—two investment grade, one junk bond as of the end of last year, right? And I'm wondering if you might shed some light on what sort of feedback followed those moments. Those are crucial thresholds to get through without any major hiccups—for investors and for your company as well, right?

Belden: Right. Despite all of the information we provide and the education we have provided, seeing is believing. Actually seeing the products perform in the way we say they're going to perform are critical proof points for advisors and investors to say, “OK, we hear exactly what you're doing conceptually. We love what you're doing. But we want to see something actually mature before we can certainly jump onboard.”

And so I think that what we have seen over the course of the past two Januarys is that we’ve matured those products you just alluded to. And we’ve seen the process go very smoothly. We’ve seen all the investors and the funds get their NAVs back as of Dec. 31, 2012, as those maturities have rolled off. And more importantly, we've seen, in each of those successive Januarys, that money came back into the BulletShares suite, in many cases.


IU.com: A clear sign that laddering, or something like it, is going on?

Belden: Right. So we’re seeing two things, I would say. One is that, as we go into the maturity year, we’ve seen a great stability in the asset base—the assets have remained intact throughout the course of the year in which the BulletShares were maturing. But we’ve also seen that money come back upon that maturity, into varying maturities, within each BulletShares suite.

So whether you're rolling down the curve to the longest date of maturity, or you're actually just jumping into the nearest date of maturity, we’re seeing that kind of adoption continue. And January was our strongest sales month ever in BulletShares. So we’re excited about that.

IU.com: So the very people who got lump sums from their redemptions turned around and brought it right back into the same product with a different maturity?

Belden: And it’s anecdotal. It’s really tough to systematically track exactly what's happening. But we know enough of our clients to get a good indication that the money that was being sent out is coming back into the funds. At the end of December, we sent out $175 million. And we more than made up for that, in terms of the flows that we got back into the product in January. So we’re very encouraged by those results.

IU.com: And with regard to iShares, to ask a slightly thornier question, they clearly seem to be willing to compete on price, right?

Belden: Yes.

IU.com: I’m wondering to what extent that’s a road that Guggenheim would think about going down to defend the BulletShares franchise?

Belden: Well obviously, it’s a space that we’ve established a strong penetration and position in. And we’re looking to maintain and actually grow that. We look at all of the variables that investors take into account when they're making their purchase decisions. Obviously, cost is a very important one. And they're on file with their product. And we’re looking to make sure that we continue to defend our value proposition to investors. And certainly, cost will be a part of that.

IU.com: What kind of things might we expect from Guggenheim as it relates to this new phase of more thoughtful and careful product development we’re seeing in the ETF industry?

Belden: We still believe there's a long road to go before fixed income is appropriately represented within the ETF wrapper. It got a late start relative to the equity product wrapper for ETFs. But we’ve seen dramatic growth within fixed income. And we all know fixed income, as an overall marketplace, is exponentially larger than the equity marketplace. So there's a lot of room to grow there.

Now, how effectively do you do that? Well, obviously, the fixed-income market has been much more opaque throughout its history as it relates to how you transact in that marketplace. And we really feel like ETFs have cast a new light—in terms of price discovery, and visibility, and transparency—into the fixed-income marketplace. And with that added exposure, we feel like the value proposition for ETFs and fixed income has even further been enhanced. So we’re looking at continuing to grow our business within the fixed-income marketplace.


Belden (cont'd.): And we really believe that there are many fixed-income asset classes that are best represented through an active approach. There are certainly merits to a passive approach, but we really feel like Guggenheim has a core competency in active fixed-income management.

We have two active fixed-income strategies that are out right now. We have an enhanced short-duration product — (GSY) — that’s gotten good traction in the marketplace. And given this particular environment that we’re in—with very low interest rates, and the regulatory reform impacting money market funds—we really feel like investors are going to be seeking alternatives to what they're doing with the strategic cash part of their portfolio. So that is one of the active strategies that we have.

IU.com: One final question:One of the trends people talk about now in the ETF industry is there’s a plethora of securities—1,400-plus now and counting. And there’s this notion that these global-macro types are people who put together allocation plans for others that are on the verge of getting some serious traction. After all, there are some really talented prospectors who don’t have the time or maybe the inclination to get their heads around all these ETF tools and how best to deploy them. Would you comment on the extent to which Guggenheim might travel in that traffic and serve up some allocation strategies that might be helpful to the advisors who use your products?

Belden: Yes, there are a couple of paths to follow there. We see that asset growth within ETFs have really been driven recently with the increased adoption of asset allocation portfolios that many of the people attending the [ Inside ETFs ] conference are actually providing. So model allocations are getting a lot of traction within financial services in general. And we certainly find that we have a capability—from an asset allocation perspective—to not only have products that fit within those models, but also to drive a more comprehensive solution for asset allocation, whether it be a global-macro approach or just providing particular sleeves to that.

So right now, we’re focused on distributing our products within the models that are largely being provided by the registered investment advisors and other financial advisors that are doing so. But we also see an opportunity for us on the asset allocation front to prepackage some solutions for clients. And that’s an active part of our current R'D.


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