An Active Corporate Bond ETF to Navigate Changing Market Conditions

Investors should consider an actively managed fixed income exchange traded fund strategy that is equipped for rapidly changing market conditions.

In the recent webcast, They’re Back: The (Renewed) Case for Corporate Bonds, Will Creedon, Director of ETF Capital Markets, John Hancock Investments, explained the benefits of using an ETF wrapper with an actively managed investment strategy.

Currently, 61% of advisors indicated that they use ETFs to access U.S. fixed income markets. Despite the rapid growth in fixed income ETF assets, bonds held in U.S. ETFs still only represent under 2% of the $46 trillion investible bond universe.

Contributing to the slower adoption of bond ETFs, naysayers have pointed to common concerns on fixed income ETF structure during market volatility. When markets encounter periods of stress, investors are often concerned that the ETF structure will break down due to a few general themes. However, Creedon pointed out that even at the height of 2020 volatility, the increases in ETF trading volumes did not lead to material activity by ETF portfolio managers to trade underlying holdings to process create/redeems. ETF create/redeem metrics remained in-line with the historical average at about 1 to 10.

Creedon also argued that an active touch in bond strategies may be a better approach than traditional indexing.

“The composition of the U.S. bond market has changed dramatically over the last 15 years,” Creedon said. “Passive core bond indices like the Bloomberg Barclays US Aggregate Index follows the overall composition of the U.S. bond market and has been forced to increase exposure to low yielding U.S. treasuries and corporate bonds.”

Consequently, a changing composition has presented passive fixed income investors with heightened risk. Creedon noted that the falling interest rates have allowed borrowers to issue longer-dated maturities, causing durations to rise, which poses increased rate risk should interest rates increase. Meanwhile, driven by rising debt, the credit quality of passive indices has fallen.

“While low yields are a headwind to investors, the range of returns between fixed income sectors provides opportunities for active managers to add value,” Creedon said.

A Corporate Bond ETF Option

John Hancock Investment Management LLC recently launched the John Hancock Corporate Bond ETF (JHCB). The ETF is the first fixed income ETF advised by the firm and is sub-advised by Manulife Investment Management (US) LLC, John Hancock Investment’s affiliated asset manager.

“We build funds based on investor needs, then search the world to find proven portfolio teams with specialized expertise in those strategies. Through our multimanager approach, we apply vigorous oversight to ensure that they continue to meet our uncompromising standards and serve the best interests of our shareholders,” Creedon added.

Howard Greene, Senior Managing Director and Senior Portfolio Manager, Manulife Investment Management, underscored some key highlights of the active strategy. The fund’s team has been managing other fixed income products together for 18+ years, consistently using a similar investment approach. Security selection and industry allocation are primary drivers of relative performance. JHCB seeks to maximize return per unit of risk.

“We believe strong relative performance can be generated through bottom-up active management of industry allocation and issue selection, combined with yield curve positioning. Our disciplined investment process seeks to add value by following a relative value approach to sector allocation and issue selection, engaging in intensive fundamental credit research, and identifying points on the yield curve with the greatest return potential,” Greene said.

Portfolio construction of JHCB adjusts the teams’ current holdings and views to be represented in a single sector portfolio and managed relative to a single sector benchmark. For example, investment-grade corporates are carved out of the U.S. Core Fixed Income Strategy. Characteristics of holdings are considered relative to the Bloomberg Barclays U.S. Corporate Bond Index. Positions are adjusted based on key risk statistics versus the index.

Financial advisors who are interested in learning more about corporate bonds can watch the webcast here on demand.