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Inside Cambria's New Sovereign High Yield Bond ETF

Zacks Equity Research

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. Yields on Japan's benchmark 10-year government bond slid to sub-zero for the first time in February. Following the European Central Bank, Bank of Japan introduced negative interest rates in late January. Denmark, Sweden and Switzerland adopted similar measures.

 

Because of these factors, high income bond ETFs have of late gained a lot of popularity as investors continue to search for attractive and stable yield in the ultralow rate interest environment.

 

This trend continues with Cambria, which has launched a fund with a global coverage, focusing on the high income space. In fact, the global footprint made the fund more attractive given the ultra-low interest rate backdrop prevailing in most developed economies.

 

Below, we have highlighted the newly launched fund – Cambria Sovereign High Yield Bond ETF (SOVB) – in greater detail.

 

SOVB in Focus

 

Listed on the NYSE Arca, the product is an actively managed ETF and does not track any specific index. It seeks income and capital appreciation by investing in securities and instruments that provide exposure to sovereign and quasi-sovereign bonds. Cambria uses a quantitative model with yield as the largest determinant to select bond exposures for the fund.

 

The fund has an expense ratio of 0.59% and will pay dividend on a quarterly basis. The fund invests in liquid debt securities across the globe. From a country perspective, India takes the top spot with about 10% of the basket followed by Brazil (8%), Russia (6.2%), China (5.9%) and Peru (5%). As for maturity, the fund is well diversified between bonds maturing in less than 5 years (33.6%), between 5 to 10 years (39.8%) and 10 to 20 years (26.6%).

 

Launched in the last week of February, the fund has already amassed $2.6 million in its asset base. The fund is up 2.1% in the last 10 days.

 

How Could it Fit in a Portfolio?

 

The ETF could be well suited for income-oriented investors seeking higher longer-term returns with low risk. With interest rates being low in most developed nations, the appeal of high income bonds has increased as these offer strong yields. Meanwhile, sovereign bonds are generally issued by the government of a country and considered one of the safest options in the bond fund category and are ideal for a risk-averse investor.

 

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.

 

Competition

 

The ETF does not have any direct competitor as there is currently no other actively managed sovereign high yield bond ETF available to U.S. investors. The fund provides investors a new way to play the high yield bond market with liquid sovereign and quasi-sovereign bonds. The product charges moderately high fees from investors annually due to its unique strategy.

 

However, there are quite a few international bond ETFs which specifically target particular regions. Of these, the popular fund, iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB), has a total asset base of $5.1 billion. This fund tracks the JPMorgan EMBI Global Core Index and trades in heavy volume of 1.1 million shares per day and charges 40 bps in annual fees.

 

Another fund targeting the emerging market bond space is Emerging Markets Sovereign Debt Portfolio (PCY) with AUM of nearly $2.7 billion and exchanging 919,000 shares a day (read: Enjoy High Yield with These Low Beta EM Local Currency Bond ETFs).

 

Apart from these, SOVB could also face competition from international high yield bond funds – Market Vectors International High Yield Bond ETF (IHY) with an asset base of $125.2 million, Global High Yield Corporate Bond Fund (GHYG) with AUM of $87.6 million and Global ex USD High Yield Corporate Bond Fund (HYXU) with AUM of $160.8 million.

 

Thus, SOVB 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 international bond ETF space. The ETF’s plan of safer sovereign bond and its emphasis on liquidity are noteworthy, but its success is a huge factor of the returns it manages to generate.