There’s been plenty of ink spilled over the decline and death of bonds. Thanks to the Fed and its reversal of years’ worth of zero interest-rate policies, bond prices are set to fall. As you remember, there’s an inverse relationship between bond prices and interest rates.
But you wouldn’t know that from this week’s ETF launch schedule. The pending death of bonds has been set on the back burner.
Fixed-income investments continue to play a major role in portfolio construction, and ETF issuers continue to highlight that fact. The bulk of this week’s launches are bond related. However, adding a dose of smart beta and active management, this week’s ETF issuers hope to solve the problems of rising rates and seek a more total return approach for the fixed-income markets.
| Ticker | Name | Issuer | Launch Date | ETFdb.com Category | Expense Ratio |
|---|---|---|---|---|---|
| (NUSA ) | NuShares Enhanced Yield 1-5 Year U.S. Aggregate Bond ETF | Nuveen | 03/31/2017 | Total Bond Market | 0.20% |
| (JPGB ) | JPMorgan Global Bond Opportunities | J.P.Morgan | 04/06/2017 | Total Bond Market | 0.55% |
| (ARCM ) | Arrow Reserve Capital Management ETF | ArrowShares | 03/31/2017 | Money Market | 0.38% |
| (COM ) | Direxion Auspice Broad Commodity Strategy ETF | Direxion | 03/30/2017 | Commodities | 0.70% |
Nuveen Keeps It Coming
Investment giant TIAA-CREF’s Nuveen division continues to roll out new fixed-income ETFs, quickly becoming a major player in the industry through its NuShares lineup. The vast bulk of these have been smart-beta ETFs. The newly launched NuShares Enhanced Yield 1-5 Year U.S. Aggregate Bond ETF (NUSA ) continues on this tradition.
At first blush, NUSA is like any other investment-grade intermediate bond fund – and they are a dime a dozen. The ETF will own U.S. government securities, corporate bonds, MBS and other asset-backed securities. Nothing special here, but what does make NUSA special is how it weights these bonds. The ETF will use a variety of screening methods to allocate higher weights to bonds and sectors that have the potential for higher yields while maintaining comparable risk. So NUSA’s underlying holdings will look a lot different than comparable indexed ETF, the iShares Intermediate Credit Bond ETF (CIU ).
The hope is that NUSA will be able to add some extra performance and yield while keeping its same risk profile. Given NuShares strong performance metrics so far, it could achieve those goals. Expenses for the fund run at a dirt cheap 0.20%.
For a full list of all of Nuveen’s smart-beta ETFs, check out its issuer page here.
J.P. Morgan Looks for Opportunities Everywhere
One of the best ways to overcome rising rates is to not stay grounded in the good ol’ U.S of A. Interest rates are different in France, Chile and Japan than they are here. The JPMorgan Global Bond Opportunities ETF (JPGB ) hopes to exploit that.
The actively managed bond ETF has no constraints, meaning it can go anywhere – either developed or emerging markets – and own anything from super-safe treasury securities to high-yielding floating loans. This flexibility allows for JPGB to provide extra returns and bypass many of the issues with rising rates here at home. As such, the fund is more of a total return package than a “safe” rock for your portfolio. However, for investors looking to steady returns with a boost, JPGB could be it.
Arrow Focuses on Cash Management
While rates are rising, they still remain pretty low; it will take a while to reach pre-recession highs. For those investors holding cash or money-market funds, that’s a problem. You simply cannot beat inflation at this point with today’s paltry yields. The latest from Arrow Shares hopes to overcome that issue.
The Arrow Reserve Capital Management ETF (ARCM ) is trying to be a better money-market fund. The actively managed ETF will invest in short-date securities (both government and corporations) and seek to provide a stable net-asset value. With an average duration of just 18 months, ARCM isn’t super short term so it does provide slightly more yield than a regular money-market fund. The idea is that investors can use the ETF to get cash management features and a better distribution.
With pending regulation changes, ARCM could see inflows as investors look for money-market alternatives in the ETF space. However, 0.38% fees may be a hurdle.
Check out MutualFund.com’s ETF tool and learn how you can get more bang for your buck when it comes to money-market funds.
Commodities on the Menu at Direxion
Higher interest rates also mean inflation is starting to tick up, which should benefit commodities and natural resources. Over the last few months, prices for items like copper, wheat and crude oil have all ticked upwards. To that end, fund sponsors have also taken a big shine to commodities ETFs.
While known for its leveraged ETFs, Direxion has been branching out into more mainstream funds as of late – albeit, with a twist. Its new Direxion Auspice Broad Commodity Strategy ETF (COM ) is a prime example.
COM will focus its attention on 12 common commodity-futures contracts. It’ll go long on these contracts to profit from rising commodity prices. However, during flat periods of time, rather than rolling its contracts over, COM will simply go to cash. This should limit the problems with contango and backwardation that occur with futures trading. In the end, this innovative roll strategy could give the fund an edge with which to overcome more popular futures ETFs. The added fact that COM comes with a regular 1099 rather than a K-1 statement doesn’t hurt either.
The Bottom Line
While the death of bonds at the hand of rising interest rates is well known, they are still a very important piece of your investment pie. To that end, ETF sponsors have been trying to find new and innovative ways to overcome the problems with falling prices. This week’s launches are the latest salvo in that fight.
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