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Why Are Active Fixed Income ETFs Flushing the Market?

Sanghamitra Saha

The investing world has been witnessing tectonic shifts lately with improving global economic fundamentals. Investors’ sentiments are now not the same as they were just after the financial meltdown in 2008. Since then, central banks of the developed world practiced heightened accommodative polices, cut rates to rock-bottom levels and rolled out quantitative easing.

Years of such practice have now put the global economy on a decent ground, inflationary expectations have been rising and bond yields have been on an uptrend. This is especially true given that the Federal Reserve hiked its key rates for the first time after almost a decade in December 2015, enacted the second hike in December 2016 and is on its way to tighten the monetary policy faster this year.

Plus, the inflationary outlook in the U.S. got a boost since when Donald Trump won the President. Trump's proposed $1 trillion spending plan and slash in personal and corporate taxes injected fresh optimism in the otherwise decent U.S. inflation (read: 5 Top-Ranked Sector ETFs Thankful to Trump).

In fact, U.S. consumer inflation started off 2017 at a five-year high reading. Inflation rose 2.5% year over year in January 2017, following a 2.1% rise in December and above market expectations of 2.4%. The inflation rate picked up pace for six months in a row to reach the highest level since March 2012, mainly helped by gasoline prices.

Needless to mention, rising inflationary expectations result in rising bond yields. Yields on 10-year U.S. Treasury rose from 1.37% on July 5, 2016 to 2.42% on February 17, 2017. German 10-year government bond yield too went up in January to match rising inflation (read: Will 2017 Be a Year of Global Reflation & TIPS ETFs?).

Why is Activeness Required in Bond Portfolio?

As said above, the bond market is in doldrums. Signs of a great rotation or a shift from bonds to stocks are palpable. Investors should note that the ultra-popular bond ETF iShares 20+ Year Treasury Bond TLT lost about 8.2% in the last one year (as of February17, 2017) and is expected to remain subdued in the coming days on rising rate prospects. Only occasional volatility will give a support to these safe-haven government bonds (read: Bull Market for Bond ETFs Coming to an End?).

This is why issuers needed to focus on actively managed bond ETFs. First, the space is still under tapped. As per the source, “fixed income ETFs first launched in 2002, almost a decade after the first equity ETF, the SPDR S&P 500 (SPY) did.” Bond ETFs presently make up for about $450 billion worth of assets compared with about $2.5 trillion in equity assets. Such less AUM base is noticed despite the fact that the global bond market is 30% larger than the stock market.

Plus, changing market dynamics also make it important for issuers to roll out smart and actively managed ETFs in the fixed-income space. Only this way it is possible to dodge the losing proposition and ongoing volatility in the fixed income market, and at the same time get better exposure to the study segments of the bond market and enjoy solid current income.

Below we highlight some new active bond ETFs that garnered sizable assets within a short span of the launch.

First Trust TCW Opportunistic Fund FIXD

The fund will seek to maximize long-term total return by investing in corporate and government debt securities and other fixed income instruments including high yield and floating rate securities. The fund may also invest in other securities, such as derivatives to lower volatility. It charges 55 bps in net fees, hit the market in mid-February and amassed about $50 million in assets (as of February 17, 2017).

Virtus Cumberland Municipal Bond ETF CUMB

The fund fetched about $23 million in assets since inception in mid-January. The fund gives investors exposure to “Cumberland Advisors' portfolio strategy and its top-down economic approach to municipal bond management.” The fund focuses on both shorter-term and longer-term bonds.

Virtus Newfleet Dynamic Credit ETF BLHY

The fund seeks to generate competitive total return from both income and capital appreciation, as well as provide a hedge against rising interest rates. It charges 68 bps in fees and hauled in about $138.25 million in assets hitting the market in December 2016.

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ISHARS-20+YTB (TLT): ETF Research Reports
VIRT-CUMB MB (CUMB): ETF Research Reports
FT-TCW OPP FI (FIXD): ETF Research Reports
VIRT-NWT DYN CR (BLHY): ETF Research Reports
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