Tag Archives: david-fabian

Digging Into 2 New DoubleLine ETFs

It’s difficult to dispute the success of the first ETF offering from DoubleLine, which has managed to acquire more than $2.3 billion in assets during its short 14-month tenure. The SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ) is a hybrid strategy that is sourced from two prominent fixed-income mutual funds that are run by Jeffrey Gundlach. I have long been a fan of Gundlach’s approach and have owned his flagship DoubleLine Total Return Bond Fund (MUTF: DBLTX ) for myself and clients for some time now. I have also recommended the TOTL strategy for those who are seeking a core fixed-income fund with a lower average duration than the Barclays U.S. Aggregate Bond Index. Looking at a chart of TOTL versus its benchmark over the last year, the active fund has aggressively lagged the passive index. This has primarily been a result of the strength in treasuries and investment grade corporates in addition to differences in duration exposure. TOTL isn’t designed to kill the benchmark in a falling interest rate environment that favors longer duration. It’s designed to offer a more competitive yield with moderated interest rate risk. That’s its true value for those who are seeking a differentiated approach to their fixed-income allocation. Note that TOTL currently sports a 30-day SEC yield of 2.90% versus 1.90% for the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ). Recently, Gundlach and State Street released two new actively managed ETFs that are also aimed at setting themselves apart from the pack. These include the SPDR DoubleLine Short Duration Total Return Tactical ETF (BATS: STOT ) and the SPDR DoubleLine Emerging Markets Fixed Income ETF (BATS: EMTL ). STOT is aimed at an even more conservative mix of bonds with a similar multi-sector approach as TOTL. The fund sports a modified adjusted duration of 2.40 years compared to TOTL’s 3.73 years. Think less price volatility and also a concomitant step down in yield. The new fund hasn’t paid a dividend yet, so we don’t know exactly what the difference in yield will be. However, suffice it to say that this type of fund will be deemed more of a place holder for those who want to focus on capital preservation with a small income stream. Bear in mind, you will have to pay a 0.45% expense ratio to access the STOT conservative strategy. That sounds on the high side for a short duration bond fund, but may still be acceptable for those who are stepping out of an even more expensive mutual fund alternative . There are also several other active low duration competitors in the ETF space by the likes of PIMCO, Guggenheim, Fidelity, and others. The more interesting fund from my perspective is EMTL. Prior to the launch of this ETF, there were only four other actively managed bond funds in the emerging market category. That makes for a very enticing opportunity to exercise their expertise in country screening, security selection, risk management, and duration positioning. The EMTL portfolio will be managed by Luz Padilla, who runs the emerging market strategies for the open ended DoubleLine mutual funds as well. One of the advantages of the looser active management restrictions in EMTL is that the fund manager can select both corporate and sovereign debt in the portfolio. Most passively managed indexes and even some of their active counterparts are relegated to one or the other. The comingling of these two emerging market bond classes can potentially unlock greater value and allow for superior differentiation from its peers. At the outset, EMTL has heavy exposure to bonds in Latin America via Mexico, Peru, Colombia, and Chile. It currently sports a modified adjusted duration of 5.34 years and will likely offer a competitive yield to other funds in this category. This type of fund may offer investors a way to add a tactical emerging market bond allocation in tandem with core fixed-income or other strategic yield enhancing plays. Furthermore, this fund only sports a modestly higher expense ratio than traditional options as well. EMTL carries a net expense ratio of 0.65% versus 0.50% in the PowerShares Emerging Market Sovereign Debt Portfolio (NYSEARCA: PCY ) and 0.40% in the iShares JPMorgan Emerging Market Bond Fund (NYSEARCA: EMB ). The Bottom Line It will be interesting to watch how both these new offerings evolve over time and whether the active management underpinnings add value for shareholders over a passive benchmark. DoubleLine has been known to make some bold calls with their global bond exposure and these funds will likely stand out from the pack in their overall positioning. Disclosure: I am/we are long TOTL, PCY, DBLTX, EMB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

3 High Yield ETFs That Must Be On Your Radar

The high yield landscape has been a difficult one to navigate over the last year. The pernicious selling in commodities combined with a rocky road for stocks has led to sliding prices in junk bonds, master limited partnerships, and mortgage REITs. These asset classes have been pilloried for luring in yield-seeking investors, only to have the rug pulled out from under them as credit conditions deteriorated. Hopefully an important lesson has been learned – the higher the yield, the higher the risk of capital invested. Those that were burned the worst may be taking the tact of avoiding these sectors altogether . However, monitoring exchange-traded funds that track high yield indexes can be a useful endeavor. They can often provide insight into underlying stock market or debt dynamics as well as serve up trading opportunities showing relative value characteristics. Let’s delve into some of the most important high yield ETFs that should be on your radar. iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA: HYG ) HYG is the largest high yield bond ETF with $16.7 billion in total assets. This passively managed index fund owns nearly 1,000 corporate bonds of companies with below-investment grade credit ratings. These types of fixed-income instruments are often referred to as “junk bonds” because of their lower quality credit fundamentals. Investors who own a basket of junk bonds like HYG are nominally compensated for the higher risk by receiving a much higher yield than Treasuries or investment-grade corporate bonds. HYG currently has a 30-day SEC yield of 6.96% and income is paid monthly to shareholders. A peek at the chart below shows how HYG broke below its 200-day moving average nearly nine months ago and has been in a persistent down-trend ever since. This ETF was down over 20% from high to low, but managed to claw its way back from the abyss during the February and March rally in risk assets. The important question now is whether HYG is consolidating for another push higher or is it getting ready to rollover once again? The most bullish scenario would be a tight range of consolidation followed by a confirmed breakout to new recovery highs above the downward sloping 200-day moving average. This would likely need to coincide with further strength in broad stock market indices such as the SPDR S&P 500 ETF (NYSEARCA: SPY ). If we start to see SPY and other stock market bellwethers roll over again, then it could easily lead to a retest of the February lows for HYG. Many investors believe in the adage that “credit leads equities”. As a result, these two asset classes will likely experience a similar fate through the remainder of 2016. Alerian MLP ETF (NYSEARCA: AMLP ) Another well-known proxy of income and credit risk that is closely tied to the commodity markets are master limited partnerships (MLPs). AMLP tracks an index of the 25 largest and most liquid MLPs. These companies provide infrastructure, storage, and pipeline use for large oil and gas companies in the energy sector. The unique tax structure of MLPs allows them to pass on a large percentage of their profits to shareholders in the form of dividends. Thus, these stocks are often prized for their above-average yields. AMLP sports a yield of 11.28% based on its most recent quarterly dividend and current share price. This ETF has experienced a decline similar to junk-bond related indexes, which has been exacerbated by the downtrend in oil and natural gas prices. Similar to oil, this fund is off its lows for the year, but has been unable to regain positive territory for 2016. I believe that this index will continue to demonstrate a high correlation with the energy markets over the next several years. Another factor to the MLP story will be credit conditions , as many of these companies rely heavily on access to debt markets and other funding sources. Keep these factors in mind if you are considering investing in this ETF. It may be a long road ahead to regain sustainable momentum and volatility will likely be a key risk. iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ) If you are aggressive enough to seek out funds offering a double digit yield, then you have likely heard of REM. This ETF tracks an index of 38 mortgage REITs in the residential and commercial lending sectors. Mortgage REITs are characterized by their lofty dividends as a result of embedded leverage and low borrowing costs. REM is a very focused strategy that is arranged in a market-cap weighted methodology. As a result, the top holdings make up a significant portion of the underlying asset base. This includes significant exposure to Annaly Capital Management (NYSE: NLY ) and American Capital Agency REIT (NASDAQ: AGNC ). REM currently has a 30-day SEC yield of 12.30% and income is paid quarterly to shareholders. It’s easy to see how investors can be lured into mortgage REITs by the tremendous yields. However, the volatility and risk that is associated with maintaining that dividend is often overshadowed. This ETF has also traced a path similar to high yield bonds over the last 12 months and has just recently experienced a sharp rebound. Future price action in this ETF is likely going to be governed by a combination of factors including real estate fundamentals, credit trends, and overall appetite for risk in aggressive income assets. Keep in mind that ETFs with high sensitivity to credit risk are best purchased during periods of duress in order to capitalize on their relative value to high quality fixed-income. Furthermore, these tools will require heightened vigilance in order to take advantage of their volatile nature. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

Covered Call ETFs Sidestep Market Volatility

Many investors have now transitioned to a lower stock allocation during the midst of this early 2016 decline. In fact, it has likely created a new sense of reality that it may be time to transition to a structure of low volatility to wait out the storm. A conventional and highly touted method has been to own stocks with lower historical price fluctuations than their peers like the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ). However, there is also another way for ETF investors to own a basket of stocks with built-in options to collect income and potentially reduce price volatility. Covered call ETFs are also often referred to as a “buy-write” options strategy. This process involves owning a group of publicly traded stocks and selling call options on the underlying securities to collect the premium. This can be done by sophisticated investors on individual positions or you can effectively own an ETF or two that will do it for you on a diversified basket of stocks. The end goal is to collect income from the options contracts, which will ultimately reduce the effectiveness of these ETFs during a sustained uptrend in the market. Nevertheless, they have shown far less relative drawdown than their fully loaded index peers during the last two recent corrections. The oldest and most established fund in this group is the PowerShares S&P 500 BuyWrite Portfolio (NYSEARCA: PBP ). This ETF debuted in 2007 and has accumulated $312 million in assets. As you can see on the chart below, PBP has been able to sidestep a great deal of the decline versus the broad-market SPDR S&P 500 ETF (NYSEARCA: SPY ). It was also able to accomplish that same feat in the summer 2015 swoon as well. It’s worth noting that over longer periods of time, the PBP performance story falls short of the stock-only SPY. This is primarily due to the drag of the options buy-write strategy on 3, 5, and 10-year time horizons. In addition, PDP charges a premium expense ratio of 0.75% for the implementation of its unique approach. The income from PBP is interesting because it often experiences big changes over time. Distributions are paid on a quarterly basis to shareholders and over the last 12-months the trailing yield is 5.40%. Some of those distributions have included short and long-term capital gains as well. Another worthy contender in this space is the Recon Capital NASDAQ 100 Covered Call ETF (NASDAQ: QYLD ). This ETF implements a similar strategy based on the NASDAQ-100 Index. The end result is a more concentrated mix of stocks with concentrations in technology and consumer discretionary sectors. This ETF has been able to achieve a similar pattern of reduced draw down relative to the PowerShares QQQ (NASDAQ: QQQ ) during periods of market stress. QYLD charges an expense ratio of 0.60% and income is distributed on a monthly basis to shareholders. This may be a more attractive feature for income investors who are searching for a more regular dividend stream . The trailing 12-month distributions indicate a yield of 10.49% based on the current share price of QYLD. These buy-write strategies have traditionally been a more obscure way to generate income while reducing draw down during sideways or falling markets. This likely means that they are going to be more of a tactical opportunity in the context of a diversified portfolio rather than a dedicated core position. Investors considering these funds should closely research the underlying mechanics of how the income is generated and compare against other potential low volatility alternatives as well. Disclosure: I am/we are long USMV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.