The ETF industry is well known for its low-cost index funds, but that hasn’t stopped some managers from trying to top their benchmarks through active management.
The vast majority of actively managed ETFs are bond funds, where analyzing individual securities can be much more complex. With interest rates on the rise and investors concerned that the 30-year bull market in bonds might be near its end, a pair of fund providers see now as an opportunity to sell investors on the benefits of actively managed bond funds.
Here are this week’s new fund launches:
|Ticker||Name||Issuer||Launch Date||ETFdb.com Category||Expense Ratio|
|(HSRT)||Hartford Short Duration ETF||Hartford Funds||05/30/2018||Corporate Bonds||0.29%|
|(FLHY)||Franklin Liberty High Yield Corporate ETF||Franklin Templeton||05/30/2018||High Yield Bonds||0.40%|
|(FLIA)||Franklin Liberty International Aggregate Bond ETF||Franklin Templeton||05/30/2018||Government Bonds||0.35%|
|(FLBL)||Franklin Liberty Senior Loan ETF||Franklin Templeton||05/30/2018||Total Bond Market||0.45%|
For a list of all new ETF launches, take a look at our ETF Launch Center.
Hartford Debuts 6th Active Bond ETF
Hartford’s approach to fixed income investing is a bit unusual in the ETF industry in that every single one of its bond funds is actively managed. Hartford offers corporate, muni, tax-aware and quality bond ETFs. This week, it adds a short-term bond fund to its lineup.
The Hartford Short Duration ETF (HSRT) will be overseen by the Wellington Management Company and target primarily investment-grade bonds with the goal of keeping the overall portfolio duration under three years. While the fund anticipates investing mainly in the investment-grade arena, it does have a fair amount of flexibility. It can invest up to 25% of assets in bonds from foreign issuers and up to 35% in junk bonds. HSRT fits in nicely with the rest of Hartford’s fixed income roster, which focuses mostly on medium- and long-term bonds.
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Franklin Launches a Trio of its Own Active Bond Funds
Not to be outdone, Franklin Investments is filling in several gaps in its fixed income lineup by adding three new actively managed bond funds of its own.
The Franklin Liberty High Yield Corporate ETF (FLHY) uses a combination of top-down macro analysis and bottom-up fundamental research to identify attractive opportunities in the junk bond space. The fund can invest in almost anything within the below investment-grade market, including corporate bonds, notes and loans, convertible securities and debentures. These securities can be fixed or floating rate and can be of any maturity or duration. The securities in the portfolio can be issued by corporations located in the United States or from any other developed or emerging market nation.
The Franklin Liberty Senior Loan ETF (FLBL) takes a similar approach to FLHY, but focuses on the senior bank loan market. These are loans that are usually backed by some form of company property, such as property or some other tangible asset. Owners of senior loans generally hold the highest spot on the repayment ladder should the underlying issuer of the loan become insolvent. Senior loan ETFs have risk levels comparable to those of junk bond funds, since many companies receiving senior loans have low credit ratings. On the plus side, because there is greater risk involved, yields on these products can be high.
There are relatively few ETFs focused on bank loans, but FLBL’s expense ratio of 0.45% qualifies as the cheapest in the group. Among the most recognizable names in the fund’s top 10 holdings currently are Michaels Companies, Sinclair Broadcasting and Caesar’s Resorts.
The Franklin Liberty International Aggregate Bond ETF (FLIA) looks to operate similarly to FLHY in that it has a broad mandate to invest almost anywhere outside of the United States. It can target either government or corporate securities that are either fixed or floating rate. While the fund can invest in both investment-grade and junk bonds, it’s limited to investing up to 20% of assets in the latter group. It’s only other significant mandate is that it owns bonds in at least three non-U.S. countries. The fund’s prospectus notes that it should be considered “non-diversified”. Therefore, expect that FLIA could become a bit more risky.
The Bottom Line
The latest batch of ETF launches brings the total number of new actively-managed bond ETFs in 2018 to 11. Given the current direction of interest rates and the fact that many fixed income ETFs are in the red for the year so far, fund issuers have seen an opportunity to sell investors on the merits of active management in a tougher fixed income environment. These new funds won’t compete on price with the largest bond index funds that charge less than 0.10%, but there is a case to be made that having a manager oversee the portfolio with the ability to shift gears quickly based on the latest market developments is a plus.
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