One of the most talked-about and intriguing categories of ETFs is the actively managed ETF. Active ETFs still represent only a small subset of the ETF universe, but a number of high-profile, traditional active managers have considered entering the space with non-transparent strategies.
WisdomTree, a pioneer in active ETFs and a leading active ETF provider since entering this category in 2008, strongly believes that transparency
is a major virtue of the ETF structure, especially in the fixed income category.
In fixed income, we see potential benefits to tapping experienced investment managers to better navigate the credit cycle
. This may be particularly true in environments where liquidity
has become compromised and the low-hanging fruit of early credit cycles is gone.
Under the guidance of Western Asset Management Company (Western Asset)1
, the WisdomTree Strategic Corporate Bond Fund (CRDT)
has developed an impressive track record since its inception on January 31, 2013.
Since its inception, CRDT has outperformed 94% of all corporate bond mutual funds and ETFs on a risk-adjusted basis (Sharpe Ratio) and 87% of all world bond funds on a similar basis.
Looking at just the corporate bond ETF category, CRDT had the second-best Sharpe ratio
(risk-adjusted returns) among 21 funds, ranking it in the top 95% of corporate bond ETFs since its inception and giving it the fifth-best absolute return.
CRDT Average Annual Total Returns
Western Asset incorporates both top-down
and disciplined bottom-up
analysis in uncovering corporate bond opportunities in the United States and around the world. By taking a global view of credit, the team at Western is able to think strategically about what risks are ultimately worth taking.
Window into Western Asset’s Current Views
A primary benefit of the daily transparency of the ETF structure is full knowledge of how a portfolio is positioned every day. An investor can get a window into Western’s worldview based on allocations to CRDT.
Right now, the team managing CRDT is cautiously constructive at current spreads
but remains vigilant in monitoring idiosyncratic risks.
• Favorites: U.S. Financials remain an over-weight, with the continued regulatory push to “Back to Basics” banking having strong bondholder-friendly implications.
• Under-weights: Conversely, greater caution is suggested in considering credits in sectors, such as energy, chemicals, communications and technology, that appear more prone to shareholder activism and M&A.
• Opportunities Lower in the Credit Spectrum: Western Asset sees opportunities in select high-yield credits, given the resiliency in fundamentals and support from positive technicals.
• Homebodies: On the whole, U.S. and UK credits are preferred to European credits across the quality spectrum.
• Less Rate Risk:
There current bias is to take on less interest rate risk
than the benchmark for the second quarter.
Ultimately, effective bond managers are only as good as their investment processes. As we have outlined in this piece, we believe that Western Asset’s approach to fixed income can be a valuable resource to investors seeking to navigate the evolution of global credit markets.
Western Asset is one of premiere value-focused fixed income managers, and CRDT is showing how active ETFs can provide differentiated and meaningfully strong performance—all while providing full transparency.
Western Asset sub-advises five WisdomTree Funds, as of 3/31/15.
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Unlike typical exchange-traded funds, there is no index that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objective will depend on the effectiveness of the portfolio manager. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile. Foreside Fund Services, LLC, is not affiliated with Western Asset Management Company.