WisdomTree Planning Global Real Return Fund

by on February 10, 2011 | ETFs Mentioned:

WisdomTree, the New York City-based ETF issuer best known for its lineup of dividend focused funds, revealed continued expansion beyond this space with a filing for a new ETF. The proposed fund seeks to offer investors a real rate of return over inflation regardless of market conditions. This will potentially be accomplished by investing in a variety of different instruments that are heavily influenced by inflation rates such as interest rates, inflation-linked bonds, and commodities. Although details regarding the fund’s expense ratio and ticker symbol were unavailable at this time, we have highlighted some of the key points regarding this actively managed fund’s methodology below.

The Fund invests in fixed income securities and other instruments designed to provide protection against inflation which the company defines as a rise in the general level of prices of goods and services over time. The Fund invests in bonds and other instruments linked to inflation rates in the United States and in developed and emerging markets throughout the world. The Fund’s investments outside the United States will focus on inflation-linked bonds from countries that are leading exporters of global commodities, such as Australia, Canada, South Africa, Brazil and Chile. The Fund is actively managed and will have targeted exposure to commodities and commodity strategies. Using this approach, the Fund seeks to provide investors with both inflation protection and income [see Inflation-Fighting ETFs Back In Focus].

The Fund also intends to invest in bonds linked to inflation rates in developed and emerging markets outside the U.S. Inflation-linked bonds tied to inflation rates outside the U.S. generally are linked to benchmarks comparable to the CPI that measure inflation rates in non-U.S. markets. The Fund may invest in derivatives, such as inflation-linked swaps, that provide exposure to inflation rates, inflation-linked bonds, or inflation-sensitive indices. The proposed product may also engage in interest rate swap transactions as well.  While the Fund intends to invest primarily in investment grade securities, the Fund may invest up to 10% of its net assets in non-investment grade securities rated “BB” or lower by at least two nationally recognized statistical rating organizations (“NSROs”) or if unrated, deemed to be of equivalent quality [also read Forget The Inflation/Deflation Debate: The Real Threat Is Biflation].

While inflation-linked securities offer protection against inflation, they are sensitive to changes in “real interest rates.” Real interest rates are interest rates that have been adjusted to remove the cost of inflation. Protracted increases in real interest rates would likely have a negative impact on the value of inflation-linked securities and the value of the Fund. The Fund may purchase futures contracts on U.S. Treasury securities or other U.S. government or non-U.S. government obligations to help minimize this risk. In addition, the Fund will invest in U.S. government securities and money market instruments (including repurchase agreements) with remaining maturities of one year or less, as well as cash and cash equivalents [read Beyond TIP: 10 ETFs To Protect Against Inflation].

The Fund intends to have targeted exposure to commodities and commodity strategies across a number of sectors, such as energy, precious metals and agriculture. The Fund may take both “long” and “short” positions in the commodities. While the Fund seeks exposure to commodity markets, it does not expect to invest in commodities directly. The Fund seeks to gain exposure to commodity markets, in whole or in part, through investments in a subsidiary organized in the Cayman Islands (the “WisdomTree Subsidiary”). The WisdomTree Subsidiary is wholly-owned and controlled by the Fund. The Fund’s investment in the WisdomTree Subsidiary may not exceed 25% of the Fund’s total assets at the end of each tax year quarter. The Fund’s investment in the WisdomTree Subsidiary is expected to provide the Fund with exposure to commodity returns within the limits of the federal tax requirements applicable to investment companies, such as the Fund. Unlike the Fund, the WisdomTree Subsidiary may invest without limitation in commodity-linked derivatives. The WisdomTree Subsidiary intends to achieve exposure to commodities through investment in a combination of listed commodity futures, commodity index swaps and structured notes that provide commodity returns.

If approved, the fund would mark the 46th product for WisdomTree and help continue the company’s expansion in the actively managed space. Currently, the inflation-linked area is a relatively sparse one as only IndexIQ’s Real Return ETF (CPI) would offer any direct competition. The IndexIQ product, however, seeks to deliver a real rate of return by using an actively managed strategy to invest in other ETFs, currently, short term Treasury bond funds such as SHV and BIL. Thanks to this different focus, the proposed fund from WisdomTree, if ever approved by the SEC, could find some success among investors who are growing increasingly concerned about the prospect of higher inflation and ways to deliver returns above it no matter what the broader stock market is doing [also see Michael Johnston Discusses Inflation Hedges On BNN].

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Disclosure: No positions at time of writing.