Guggenheim Launches Pair Of Active Bond ETFs

by on June 1, 2011 | Updated June 6, 2011 | ETFs Mentioned:

Guggenheim became the latest ETF issuer to roll out actively-managed products on Wednesday, raising the curtain on a pair of funds that offer exposure to bond markets. The company completed the active ETF introduction by overhauling a pair of indexed bond funds, changing names and ticker symbols and dropping the target index altogether. The new active bond ETFs include:

Old Ticker Old Name New Ticker New Name
UBD Claymore U.S. Capital Markets Bond ETF GIY Guggenheim Enhanced Core Bond ETF
ULQ Claymore U.S. Capital Markets Micro-Term Fixed Income ETF GSY Guggenheim Enhanced Ultra-Short Bond ETF

UBD Becomes GIY

Historically, UBD has been linked to The Capital Markets Bond Index, a benchmark that is designed to represent that traditional investment grade securities in the United States long-term fixed income capital markets. That fund consisted of long-dated fixed income securities, including both Treasurys, mortgage-backed securities, and high quality corporate issues. The revamped GIY will seek total return, including income and capital appreciation; the fund’s adviser will employ a quantitative strategy designed to identify relative mispricings in the bond market [Handicapping The Active ETF Race].

GIY will invest primarily in U.S. dollar-denominated investment grade debt securities, including U.S. Treasury securities and corporate bonds, though the manager will have the flexibility to invest up to 10% of assets in junk bonds and 10% in sovereign and corporate debt securities denominated in foreign currencies. Given the investment objectives of the fund, GIY can be thought of as an active alternative to ETFs linked to the broad-based Barclays Capital U.S. Aggregate Bond Index, including exposure to both Treasuries and corporate debt markets. There are currently three ETFs linked to that benchmark with aggregate assets of more than $20 billion: AGG, BND, and LAG.

GIY will charge an expense ratio of 0.27%, in line with the average for the Total Bond Market ETFdb Category. AGG, which has more than $11 billion in AUM and seeks to replicate the BarCap Agg Index, charges an expense ratio of 0.24% [see GIY fact sheet]

ULQ Becomes GSY

ULQ was linked to a benchmark that consisted of investment grade securities in the U.S. money markets and in the micro-term fixed income capital markets. By focusing on low-risk securities with a short-time remaining to maturity, ULQ exposed investors to little in the way of credit risk or interest rate risk, thereby appealing to those looking for a safe haven to park cash or ride out a rough patch in equity markets.

GSY will have similar appeal; the fund will be one of the closest things to a money market ETF available to U.S. investors. While GSY won’t strive to maintain a constant per share value, this active ETF will put a premium on capital preservation. GSY will use a low duration strategy and strive to outperform the 1-3 Month Treasury Bill Index, generally maintaining an average duration of less than one year. As such, GSY will also focus on investment grade securities, though this fund will hold those at the short end of the maturity spectrum. GSY will have the flexibility to invest portions of its portfolio in junk bonds and muni securities [see GSY fact sheet].

PIMCO also offers an actively-managed ultra-short term bond ETF; the Enhanced Short Maturity Strategy Fund (MINT), with nearly $1 billion in assets under management, has become a popular tool for investors looking to scale back risk in their portfolios [Bond ETFs That Steer Clear Of Interest Rate Risk].

Active Bond ETF Boom

While active equity ETFs have generally struggled to gain traction with investors, actively-managed fixed income products have seen some more substantial inflows. According to the ETF screener, the addition of GIY and GSY makes a dozen active bond ETFs from six different issuers with aggregate assets of more than $2 billion. GSY and GIY are the cheapest actively-managed bond ETFs available, each charging just 27 basis points:

Active Bond ETFs
Ticker Name Issuer Expenses
GIY Enhanced Core Bond ETF Guggenheim 0.27%
GSY Enhanced Ultra Short Bond ETF Guggenheim 0.27%
ELD Emerging Markets Local Debt Fund WisdomTree 0.55%
MINT Enhanced Short Maturity Fund PIMCO 0.35%
ALD Asia Local Debt ETF WisdomTree 0.55%
MUNI Intermediate Muni Bond Strategy ETF PIMCO 0.35%
HYLD Peritus High Yield ETF AdvisorShares 1.35%
BABZ Build America Bond Strategy ETF PIMCO 0.45%
SMMU Short Term Muni Bond Strategy ETF PIMCO 0.35%
PLK Active Low Duration ETF PowerShares 0.30%
GMTB Core Bond Strategy Fund Columbia 0.35%
GMMB Intermediate Municipal Bond Strategy Fund Columbia 0.35%

Part of the interest in active bond ETFs may be related to the potential drawbacks that emerge when fixed income exposure is achieved through passive replication of a cap-weighted index. In addition to a tendency to give larger allocations to larger issuers of debt, many indexed bond products may expose themselves to front-running or other drags on return [see Q&A With Matthew Patterson: Are Bond ETFs Broken?].

The conversion of UBD and ULQ to actively-managed ETFs also signals the end of one lingering reminder of the company’s history; both of those funds had kept “Claymore” in the ETF name, but will now be re-branded as Guggenheim ETFs. Guggenheim completed its acquisition of Claymore in late 2009.

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Disclosure: No positions at time of writing.