We recently had the chance to speak with William Belden, Guggenheim’s managing director, head of ETF business development, and Anne Walsh, assistant CIO, fixed income. We discussed Guggenheim’s strategy and unique approach to bond investing.
We also discussed Guggenheim’s recent ETF launch: the Guggenheim Total Return Bond ETF (GTO ), which is an active ETF that seeks exposure to any style of fixed-income security, including various credit ratings, countries and durations.
ETFdb.com (ETFdb): What is Guggenheim’s overall strategy in the ETF space?
William Belden (W.B.): Our ETF strategy is to provide advisors with access to investment strategies that add value to their ability to achieve the investment objectives of their clients. We seek to do that by offering innovative strategies that provide unique exposure across a breadth of asset classes. Beginning with the launch of the first strategic-beta ETF, the Guggenheim S&P 500 Equal Weight ETF (RSP ) in 2003, and continuing through the first defined-maturity corporate bond ETFs, our Guggenheim BulletShares ETFs, Guggenheim has consistently delivered upon our pledge to provide value-added investment solutions to our clients.
ETFdb: Anne, as a portfolio manager on the Guggenheim Total Return Bond ETF (GTO ) that launched on February 10, can you tell us about the ETF and what makes Guggenheim unique in terms of its actively managed fixed-income investment philosophy?
Anne Walsh (A.W.): Other asset management firms have portfolio managers deciding which bond goes into the portfolio, picking between two issuers, doing all the credit work, trading with the Street, and managing clients. By comparison, we are one of the few managers, if not the only one, that adheres to the school of behavioral finance and its tenets. Our philosophy was developed in the late 1990s to early 2000s, and is based on the work of psychologist Danny Kahneman. Though not an economist, Kahneman won a Nobel Prize in economics for his contributions to decision theory, specifically how it affects investment decisions. The substance of behavioral finance is that investors—whether individuals or institutions—value avoiding loss more than they value what is now termed “alpha.” Avoidance of loss filters through everything we do and is particularly relevant to fixed-income investing.
ETFdb: What sets GTO apart from competitive products such as the SPDR DoubleLine Total Return Tactical (TOTL ) and PIMCO Total Return Active (BOND )? Is there anything aside from the lower expense ratio? Perhaps a different strategy, focus, or any other competitive advantage?
A.W.: We have our macroeconomic team making economic calls, creating the house view, and telling us about outlooks on GDP, actions by the Fed, yield curve shape and shift, and areas that are a problem, potentially. Then we also have individual sector teams for corporate credit, asset-backed securities, municipals, rates, etc., working to find the best individual securities. And then the portfolio construction and portfolio management teams step in. So we’re not having portfolio managers making decisions in regards to rates or individual securities selections. When the sector teams decide what they’re going to recommend for purchase, the managers determine where it fits.
ETFdb: I understand that this launch is the ETF version of the Guggenheim Total Return Bond Fund (GIBIX), which is a mutual fund. Why did Guggenheim decide to launch an ETF equivalent of this mutual fund?
W.B.: We’re seeking to deliver the strengths of Guggenheim across a breadth of products to enable investors to have choice when determining the best product wrapper to suit their needs. Our ability to deliver our core fixed-income strategy in an ETF serves that client constituency who prefer the advantages that the ETF structure brings.
ETFdb: Who should invest in your funds? In other words, why should an investor be interested in an actively managed instead of a passively managed ETF?
A.W.: It depends on the investor’s goals and time horizon. Guggenheim’s lineup of BulletShares ETFs are passively managed and used by many advisors to build bond ladders instead of holding individual bonds to maturity. But in looking to outperform a passive index, especially with the traditional view of core fixed-income management quickly becoming antiquated in a persistent low-yield environment, investors and advisors must begin looking toward alternative solutions.
Nearly two-thirds of the Barclays Capital U.S. Aggregate Bond Index is composed of low-yielding government or government-related securities. Our investment team’s rigorous and specialized credit analysis works to uncover attractive duration and yield in otherwise underappreciated asset classes, such as commercial asset-backed securities (ABS) and collateral loan obligations (CLOs), while seeking to deliver strong performance independent of the Barclays Aggregate. We do our best work in the nonindexed space. The U.S. fixed-income market is about $38 trillion, and of that, $17 trillion appears in an index. That leaves a whole lot of space for assets that aren’t in the Barclays’ Aggregate Bond Index.
ETFdb: There is a fund flow movement among investment advisors and investors away from active mutual funds into ETFs. Do you believe mutual funds and ETFs can coexist and “play nicely together” in the long term?
W.B.: In terms of fixed income, it’s not as much of a question of mutual funds or ETFs because both investment vehicles have considerable merit among advisors and investors. What we’re seeing in the fixed-income space is increased interest in actively managed strategies. In particular, ETFs have become an increasingly popular way to gain fixed-income exposure because of their transparent, convenient and cost-effective structure, as evidenced by asset growth, which outpaces that of fixed-income mutual funds. Actively managed bond ETFs have become popular with investors, thanks in part to the potential drawbacks of using an indexing strategy when seeking fixed-income exposure. Rigorous and specialized credit analysis can uncover attractive duration and yield in otherwise underfollowed asset classes—this simply can’t be achieved through indexing.
ETFdb: What is your view of the markets going forward? Do you believe investors are more eager to gain exposure to less risky asset classes such as bonds and bond ETFs, as opposed to equity because of the recent turmoil in the markets?
A.W.: Weak global economic conditions have stirred negative sentiment in global financial markets, but we believe this will be a passing storm in the United States. Supported by our positive top-down view that the United States is unlikely to enter a recession, we have been cautiously adding to higher-beta credit assets since October 2015, in strategies where we have the flexibility to implement our best ideas. Our constructive outlook on the U.S. economy also supports our positive view on the non-Agency residential mortgage-backed securities (RMBS) market. Non-Agency RMBS generally offer 3.5% to 5% yields that are floating, senior, and amortizing, and reflect conservative expected default and recovery assumptions.
After one of the worst starts to a year in memory, investors may be excused for putting their heads back under the covers and staying there until spring. But the potential for regret would be high. In an environment in which high-quality assets are trading at multiyear low valuations, the coming months may turn out to be one of the better investment opportunities in the last five years.
When markets are volatile and sentiment is rapidly shifting, picking a perfect bottom in asset prices is not possible, and valuation itself is a poor timing mechanism. The way forward will continue to be volatile, and the pain is just starting in earnest for much of the energy sector. However, high-yield bonds in general and energy in particular are pricing in a disaster and a U.S. recession, neither of which appears to us to be in the cards. Just like many retailers, the markets have declared a post-holiday sale, and wise investors may find value, especially in credit.
The low and volatile price of oil is likely to be with us through the first quarter, but the broader U.S. economy is not near a recession, in our opinion, and we should see oil supply and demand moving into more of a balance by the second half of the year. Although challenges related to the strong dollar and the low price of oil continued in January, housing and employment improved, which supports consumer confidence.
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