Given the rising rate environment ahead, more investors are looking into actively managed exchange traded funds that are better equipped to adjust and adapt to quickly changing conditions.
ETF Trends publisher Tom Lydon spoke with Jonathan Stanley, Managing Directory and Portfolio Manager at Newfleet Asset Management, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk actively managed bond strategies.
“Active management is, we think, very powerful,” Stanley said. “If you look when people think of a bond market, they think of agency mortgage-backed and U.S. Treasury. We make all our money in all the none cores but satellite sectors, such as high-yield, leveraged loans, emerging markets. That’s what where we think we can make a lot of money for our investors.”
After years of falling rates, benchmark Barclays U.S. Aggregate Bond Index is now heavily tilted toward longer duration U.S. government debt, which may expose investors to increased risks if rates continue to inch higher.
“We think we’ve been in a bull market for the last 30 years, driven by primarily Treasury rates,” Stanley said. “We think now that there’s a potential for rates to increase. We think you have to be cognizant of not only credit risk but interest rate risk, and that’s what we do well at Newfleet.”
Fueling the rising interest rate environment, Donald Trump’s presidential election win and his promises to enact deregulation, implement tax cuts and increase fiscal spending have added to an expansionary outlook. Consequently, the Federal Reserve is considering a tighter monetary policy ahead to head off a potentially overheating economy.
“I think the potential is there for maybe three interest-rate increases,” Stanley said. “A lot will be dependent on what goes on with the U.S. economy and how many things that Trump does as far as getting the U.S. economy gaining steam.”
Consequently, investors may turn to an actively managed bond ETF to better navigate the uncertain waters ahead. For instance, the broad Newfleet Multi-Sector Unconstrained Bond ETF (NYSEArca: NFLT) will target the right areas of the global bond market at the opportune times, implementing active sector rotation and disciplined risk management to achieve long-term excess returns.
The unconstrained investment style does not require a manager to adhere to a specific benchmark. Instead, unconstrained strategies allow a manager to focus on returns across many asset classes and sectors and the styles typically have a more long-term horizon. Moreover, a portfolio manager may use derivatives and other alternative asset classes to hedge market exposure.
The ETF will analyze value assessment of sectors to determine under- and overweights, along with interest rate outlook and sector allocation targets. Next, the team will look at fundamentals and assess credit risks, company management, issue structure and technical conditions. Lastly, the managers will select high-conviction picks across 14 sectors, without restrictions on speculative-grade or non-U.S. securities.
Additionally, the more recently launched Virtus Newfleet Dynamic Credit ETF (NYSEArca: BLHY) will provide a high level of current income and capital appreciation by combining two converging credit sectors, high-yield corporate bonds and floating bank loans. By actively managing the portfolio, Newfleet is able to allocate between both asset classes at any ratio within the fund. Additionally, should market conditions merit a temporary exit from credit, the fund can allocate as much as 100 percent to U.S. Treasuries.