Sometimes strategies work because they are just that good, which has been part of what’s helping the Columbia Diversified Fixed Income Allocation ETF (DIAL ) outperform this year. Marc Zeitoun, CFA, Head of Strategic Beta and COO North American Distribution for Columbia Threadneedle Investments, recently spoke with ETF Trends CIO and Director of Research Dave Nadig about the way the rules and guidelines have been properly established to make for strong success.
As far as delving into how the rules are different and, according to Zeitoun, “therefore good,” it’s the allocation within individual sleeves of fixed income opportunities that are important, more than picking the right corner of the market. With DIAL, those allocations are based on a forward-looking and existing income opportunity, rather than something such as broad size or yield. Specifically, DIAL focusses on high-yield, emerging market debt, mortgages, investment-grade corporate, and treasuries, as that’s where the yield is, and will likely continue to be.
Then, when considering the sleeves themselves, the focus is on finding pockets quality over true junk to avoid defaults. The driving forces of DIAL are liquidity, income, and quality. Importantly, the fund also limits its bets with a 2% issuer cap, thus further maintaining quality and diversification. Likewise, emerging market exposure is limited to sovereign debt denominated in U.S. dollars to avoid currency risk.
By skipping emerging market corporates as well, they acknowledge they might miss opportunities in things like Chinese bonds, it’s consistent with the push for quality overlay.
Mortgages And Beyond
Looking to mortgages, there are similar quality skews: no Ginnie Mae’s. With corporates, Columbia Threadneedle relies on intermediate long-return maturities, between five and 15 years, and an index rating between BAA and BAA3. That removes the higher end of the ratings with the lower yield.
Zeitoun notes, “Treasuries are more maturity-based. That said, with global treasuries, the idea is to have no negative-yielding assets. That may seem obvious, but if you look at the competitive landscape, it’s not.”
Thanks to following through on each of these various rules and guidelines, DIAL can provide ready-made exposure that allocates across yield-producing opportunities while maintaining a focus on controlled quality.
For advisors, this has positioned DIAL as a way to get out of the business of managing fixed income. As some people use DIAL as a core, with satellites around the fund, it’s a fine way to handle things given the Dow’s transparency, which permits this action.
As Zeitoun explains, “Were one to recreate DIAL using the house-brand mono-line ETFs, DIAL will have outperformed almost any combination over the last three years. That’s the power of focusing not just on the allocation, but on what’s inside each sleeve.”
DIAL reached its three-year anniversary on Oct. 12, 2020, and soon after reached $500 million in assets. DIAL’s strong performance has earned it a five-star Overall Morningstar Rating among 289 ETFs and open-end funds in the U.S. Multisector Bond category, as of Oct. 31, 2020 based on risk-adjusted returns.
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