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 seeks investment results that, before fees and expenses, closely correspond to the performance of the Beta Advantage Multi-Sector Bond Index. It is one of the top performers out of 350 open-end mutual funds and ETFs in the Morningstar category of US multi-sector bonds.
Per Lydon, “Multi-sector bonds – that’s what Barclays Agg is all about. The Barclays Aggregate Bond Index is really the benchmark for fixed-income. Most financial advisors and institutions, and global non-profits; they all benchmark to the Barclays Agg.”
The Agg is currently worth $22 trillion, so while not being small, it is structured so if it were moved off the index, the Agg would be deemed risky. As a result, many managers end up buying the Barclays Agg. However, everyone wants to do better, which means risk can be worth it.
Lydon notes, “When we’re in an environment where just nine months ago, we were in a rising rate environment, and now it appears to be a declining rate environment, we can take that additional risk. We can take that additional risk in the quality of the bonds we invest in. We can take that additional risk in the duration we invest in too.”
He continues by making a point how the Barclays Agg is not as safe as it was a decade ago, due to longer duration and less credit quality. That in mind, if there’s a risk in the Barclays Agg, why not take a risk in going after better yields and managing the risk to a greater degree.
Separating DIAL From Others
As Lydon explains, this is what separates DIAL from other fixed-income funds. They have increased their allocation to corporate bonds, some junk bonds, but higher quality in those areas.
The result is a higher yield. It’s currently at 3.31%, which is better than the 30-year, and its duration is at less than the Barclays Agg, at 5.8 years.
“The idea is: look for other areas of the world you can diversify, not just corporates investment grade, not just high yield. It’s actually at 20% allocated to emerging market debt, which is really really cheap at this point in time. And DIAL goes in and takes advantage of those valuations, and helps diversify the portfolio at the same time.” Lydon adds.
When asked about building a fixed-income portfolio and what DIAL can cover, Lydon states how DIAL is a smart beta fixed-income ETF, and with certain criteria, there’s no way it can lead to a stagnant portfolio like the Barclays Agg. Additionally, looking at fixed-income allocation, DIAL shows a big difference in appreciation/depreciation, as well as the yield.
With a lack of 6-8% yields in the world, lower rates in the US, let alone negative rates overseas, there’s no way to battle that with investment dollars. Instead, it’s going to mean trying to catch up.
As Lydon explains, it means, “We have the ability between now and then to actually have some appreciation of the bonds that we hold.” He also notes, “We’re not going to be in a world where fixed-income is going to provide us that income that we’re looking for.”
Related: ETF of the Week: PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ)
This means looking at things in other ways. So, it means getting creative, moving a certain amount of allocation of the fixed-income side over to equities to go after-dividend orientated stocks or ETFs to help offset the low yields.
Bottom line, as Lydon states, “We’ve seen a lot on the equity side, but we’ve seen a heck of a lot on the fixed-income side, and we’ve got some challenges down the road, especially as more and more of us head off into retirement.”
When asked about 200-day average, Lydon notes that a long-term buy-and-hold investor with an allocation in fixed income, DIAL works really well as a diversifier to the Barclays Agg. On the other hand, keeping the next couple years in mind, the opportunity is there and one should be sure to trade on a 200-day average.
Listen to the podcast on DIAL ETF:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.