ETF Trends CEO Tom Lydon discussed the Columbia Diversified Fixed Income Allocation ETF (DIAL) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.

DIAL tracks an index comprised of six sub-indices, each representing a different sector within the fixed income space. The index allocates fixed weights to each of the six sectors.

This is a yield-generating opportunity that has recently crossed over to the $1 billion club. The fund recently saw assets hit $1 billion AUM, putting it at $222.3 million in net inflows so far in 2021.

DIAL is an alternative way to source income and manage potential income volatility. Fixed income investors face changing market conditions where they will have to better-manage income and account for income volatility ahead. Specifically, many do not realize the risks associated with utilizing a cap-weighted bond benchmark as an investment vehicle, since the traditional weighting methodology does not foster diversification, with high correlations among the various components.

For example, the U.S. Aggregate Bond Index has a heavy tilt toward treasuries. The Agg held 22% of its index in U.S. Treasuries at the end of 2007, but the tilt toward U.S. Treasuries has increased to 39% today. When factoring in debt issued by government agencies and mortgage-backed securities, the total government exposure is now over 70%.

The Agg has also seen its duration increase and yields fall over the years. Consequently, investors are now exposed to more rate risk should interest rates rise and lower yields for their increased troubles. Alternatively, investors should consider a multi-sector bond strategy filtered for opportunity rather than indebtedness.

Alternative Income Sources

Bond investors should look to alternative income sources to enhance yields and returns while potentially diminishing risk exposures. For example, the Agg does not include sector exposures like High Yield, Global Treasuries, or Emerging Market debt, which have much lower cross-correlations to U.S. Government debt. Moving out along that risk-reward profile to include these alternative income sources that could provide access to less correlated opportunities with relatively high returns.

As explained, DIAL follows an alternative indexing methodology to potentially help bond investors garner improved returns and diminish the negative effects of sudden swings. Unlike traditional market cap-weighted indexing methodologies, DIAL follows a customized, rules-based index that incorporates Columbia Threadneedle’s unique touch.

The fund tries to reflect the performance of the Beta Advantage Multi-Sector Bond Index, a rules-based multi-sector strategic approach to debt market investing. The underlying smart beta index covers six sectors of the debt market. The result is an index customized for each sector, optimizing for yield, quality, and liquidity with monthly rebalancing discipline to manage drift.

The ETF’s quality management aims to avoid the “tails of the market” by removing sectors that offer no risk premium and lower quality tiers that have outsized downside risk, which essentially means no corporates rated below single-B ratings, no sovereigns rated below double-B ratings, and no corporates longer than 15-year maturity.

Listen to the full podcast episode on the DIAL:

For more podcast episodes featuring Tom Lydon, visit our podcasts category.