Chuck Jaffe: One fund on point for today. The expert to talk about it. Welcome to the ETF of the week. Yes, it’s the ETF of the week where we get the latest take from Tom Lydon, vice chairman at VettaFi. Where they have a suite of tools is going to help you become a savvier, smarter and just better informed and well-rounded investor in exchange traded funds.
Whether you’re looking for something to add to your portfolio, you’re trying to find out what’s trending. You’re figuring out what’s new and what might be appealing to you. VettaFi.com has everything you need to be able to get that information and factored into your decisions. Tom Leyden is the vice chairman of VettaFi. He joins me now. Tom, it’s great to chat with you again.
Tom Lydon: Great seeing you, too, Chuck.
Chuck Jaffe: Your ETF of the week is.
Time to RIGS the System
Chuck Jaffe: Ticker symbol RIGS- it has nothing to do with like oil rigs or the rest of it. It’s about strategic income. So why this fund right now at a time when rates are the big story?
Tom Lydon: Well, they are the big story and active management is the big story here, Chuck. Look, this is a Alps ETF, so SS and C Alps, they have a whole variety, a whole suite of ETFs. We’ve known and we’ve talked about them before. However, riverfront is one of the biggest ETF managers out there that manage separate portfolios, not just for individual clients, but also they work with financial advisors who want model portfolios.
In addition, they also sub their own ETFs. Surprisingly, this ETF active fixed income strategy has now been in place just this week for ten years, so it just hit its ten year anniversary. And Chuck, I’ll tell you, I wouldn’t believe it unless I saw the chart myself. But if you go in to the SNC Alps website and you look up the page information on this ETF and you compare the performance of this ETF to the Barclays Aggregate Index, it’s pretty amazing that you can see during this past couple of years when we’ve seen rates really spike, how well they handled that.
So there’s really been a case for active management in a rising rate environment. You know, you don’t want to be longer duration, you don’t want to be in risky investment allocations. It was right to be more short duration or even have a certain amount of money in cash. But the key thing here, in addition to regs and this is kind of what they call it, rigs it being ten years history now active strategy.
The other thing is, at this ten year anniversary, Chuck, we’re probably within a couple of months from seeing the last hike in interest rates. What happens from that point? Well, we may go into recession. If we go into recession, what what might happen? The Fed may start cutting interest rates. So the question is going to be, what do these managers do in managing an active portfolio in that regard?
Do they start going longer duration? Do they start hoarding more corporate credit, more high yield in there? So they can actually be a part of that appreciation? I think that’s all part of it as well. So active management, is it in what people need today in fixed income? This is one of those great strategies.
Chuck Jaffe: It’s a very tricky time when it comes to fixed income in a number of different ways and specifically with this fund. Well, I’ll point out, we know that you like to be a trend follower. This fund is below its 200 day moving average and has been for a while now. That’s not a surprise. The vast majority of fixed income funds are.
But this is a fund that last year when the bond market was tanking, it was doing much better. It still was down, but it was down way less than its average peer. There are some folks who would say, I want that downside protection and I’m willing to give up some upside, because if we get to that spot where rates start to come down, that’s when bond funds profit, right?
When yields go up, bond prices go down, bond funds get hurt. Are you worried at all that when the market gets a little bit better for the bond side, that a defensive oriented fund might not keep up?
Tom Lydon: Chuck, you bring up a really good point because we know with equities that scenario happens all the time. We know that what happens when markets have corrections, that people get really nervous. Once you’ve gone a 20% or 25%, a 30% correction, what’s the average investor do? They don’t feel really good in the gut. So they start selling their positions.
They put money in cash right around the time and people know I’m talking to you right around the time the market rebounds, it starts feeling better. Okay, so operating on your gut is not the way to move forward both in equities and fixed income. So your point is well taken. They did a really good job managing the downside of higher interest rates.
The thing is, they’ve also got the ability if we do start to see rate cuts because the Fed is concerned about a recession for them to be a little bit more aggressive, nobody is talking about the money that you can make in the bond market when rates start getting cut again. A recession for the bond market probably is the best thing to happen.
And yes, we are below the 200 day average here, but a lot of people either put money on the sidelines on fixed income and they’re looking for areas or really the right point where you can top tick interest rates and start being a little bit more long duration or those people who never sold their index based strategy, their Barclays ag strategy and are sitting there still 25% off the high and they don’t know what to do.
This is an opportunity not to sell at the low, but maybe put some of that money into an active manager who during periods of time when rates start to get cut, can be well-positioned to take advantage and even get more alpha than index based strategies.
Chuck Jaffe: I’m going to ask a question about this fund, Tom, that I’m not sure we’ve asked with any fund in the history of ETF for the week. This is a fund that not too long ago Morningstar moved it from one category to another, from a global bond fund to a multisector bond fund that affects its ratings and things along those lines.
Does that do anything for you when somebody is trying to analyze a fund? Because there are going to be people who hear us talk and say, let me go out and analyze this fund and decide if it’s something I want to add. Do you say anything about like, hey, if it’s changed a little bit and Morningstar is recategorized it, does that make it better or worse, or does it change anything about how you view stuff?
Tom Lydon: Thanks for pointing that out. That’s important. It is a global bond fund, but the amount of money invested in overseas bonds is very small, so this is probably why Morningstar felt comfortable repositioning it into a sector strategy and it is a sector strategy as well, because as we all know, during times of rising interest rates are certain sectors that actually do better than others.
Also during times of lower interest rates, there are certain sectors that do better than others. This manager takes full advantage of all that and probably could do well in both categories. But as we know, Morningstar is not going to spread you out all over the place. So they had to make a decision and that’s a decision they made.
Frankly, I agree with that because their sector strategy is really good. Look, when financial companies are seeing higher interest rates, that’s really good for banks because banks can make more money because they’re lending out at higher rates. Guess what happens when rates start to decline? The amount of demand, even right from the start, starts to pick up because people are able to borrow, they’re able to get mortgages for lower than they did just a few months ago.
All of a sudden, we might see some more home buying in the fueling of that economy, and the financial sector can take full advantage of that. So, again, I don’t want to go down that rabbit hole, but that’s a great question.
Chuck Jaffe: Because everybody looks at performance and wind up saying, well, the fund, like the rest of the bond funds, was down last year and this year it’s just slightly negative, but it’s a bond fund. Most people were buying it for diversification and yield. And the yield the yield on this fund, about five and a half percent, a little bit better than that should people be more focused on the yield than on the total return since eventually these things even out in funds, generally speaking, the way they also we’ve been out of your world the paper long enough.
Tom Lydon: Yields important but in this case it’s the actual performance shock. They’ve proven their worth in the last couple of years with what’s happening with rising interest rates and how that can affect traditional fixed income allocations. I think they’re going to have an opportunity to even prove their worth more. If we happen to see rate cuts in the next 12 months, there are sector allocations and their yield allocations.
My guess is so again, I’m not the portfolio manager here, but if they’re feeling pretty strongly about the Fed cutting rates, they’re not only going to go out longer duration to be able to get better yields, but credit quality, they may put a little bit more into corporate credit, into high yield. While it’s an opportunity to make some appreciation.
So again, this is one of those active strategies and there are a lot of active fixed income strategies out there. But this has a true tenure track record and you can map it compared to what was going on with Fed funds rates. You can map it to what’s going on with recession or no recession. You can see the allocation in sectors over certain periods of time.
Look, if you’re interested in not only what’s happened the last couple of years, but the opportunities that might be ahead, This is something to check out.
Chuck Jaffe: It’s RIGS, the Riverfront Strategic Income ETF the ETF for the week from Tom Lydon. Tom, great stuff. Talk to you again next week. Thanks Chuck the ETF for the week is a joint production between VettaFi and Money life with Chuck Jaffe and yes that’s me and you can learn all about my hour long weekday podcast by going to moneylife.com or by searching wherever you find your favorite podcasts.
To learn more about investing in exchange traded funds, make sure you check out VettaFi.com. The site has everything you need to be a smarter, savvier, more well rounded investor in exchange traded funds. They’re on Twitter at Vetta_Fi and Tom Lydon, their vice chairman. And my guest well he’s also on X too, @TomLydon
The ETF for the week is here for you every Thursday. Make sure you don’t miss an episode by subscribing on your favorite podcast app for Tom Lydon. I’m Chuck Jaffe, will see you again next week. And until then, happy investing, everybody.
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