A One-ETF-Fits-All Solution in Today's Challenging Fixed Income Market

Investors are faced with a plethora of options when it comes to the bond market. In a time where volatility makes for a challenging environment in the equities market, a safe-haven move to the fixed-income market also poses its own challenges, which calls for a strategic one-ETF-fits-all solution in the Western Asset Short Duration Income ETF (CBOE: WINC).

The move to shorter durations in 2018 was seen as a defensive move to hedge further rate risk after four increases in the federal funds rate by the central bank. Despite the Fed taking on a more dovish tone as it preaches more patience with respect to interest rate policy in 2019, fixed-income investors are still opting for short duration in the event more rate hikes are underway.

WINC utilizes a short-duration fixed-income strategy with a duration of less than three years. WINC seeks to generate current income via a diversified portfolio with an emphasis on low interest rate sensitivity, higher credit quality and active credit selection.

“We’ve seen a lot of money move towards the short end of the curve and with a duration under three (years), it will be a very attractive option for them,” Rick Genoni, Legg Mason’s Head of ETF Product Management, told ETF Trends.

Flexible and Cost-Effective

At just 29 basis points, WINC is a cost-effective solution to gaining access to actively managed, low-duration, higher credit quality fixed-income exposure with a focus on current income.

Key features of WINC:

  • Income Focus: WINC seeks current income through professional security selection and duration management.
  • Low Duration: It features a diversified and flexible income strategy with the potential of lowering interest rate risk, while maintaining attractive income.
  • Higher Quality: At least 80% of the securities are investment grade (IG) credit quality.
  • Active Expertise: WINC delivers the proven insights of a fixed-income leader in a cost-effective, transparent and liquid structure, with low minimum investment.

With the flexibility inherent in its ETF wrapper, WINC offers intra-day liquidity and can be traded throughout the day. The transparency afforded by the availability of daily holdings may allow investors to make more informed investment decisions. WINC is on a monthly income distribution schedule.

An “All-Weather” Approach

WINC uses an “all-weather” approach to income that incorporates offensive and defensive strategies to proactively target higher-quality income opportunities. Having the ability to look beyond core holdings to expand the opportunity set can allow Western Asset to potentially provide attractive income throughout different market cycles.

Providing core exposure within WINC to short-maturity IG corporate bonds–with additional allocations to below-IG (up to 15%), securitized (up to 15%), structured, emerging market and other non-benchmark sectors and securities–can improve yield and diversification. Enhanced diversification helps to defensively position the portfolio and helps mitigate concentration risks.

“The product design was very thoughtful in terms of primarily being in investment-grade corporate with modest flexibility to use other sectors,” Ellen Cammer, product specialist at Western Asset Management Company, told ETF Trends.

Employing an active process that is both top-down and bottom-up helps identify unique value opportunities. The bottom-up focus pursued by Western Asset’s team of seasoned analysts includes in-depth and disciplined issue, issuer and subsector selection.

Essential Parts of the Top-Down Component:

  • Duration management
  • Yield curve positioning
  • Sector exposure, driven by long-term perceptions of economic behavior and relative valuations

The types of investments in the WINC fund can include corporate debt securities, including notes, bonds, debentures and commercial paper: fixed-income securities usually issued by businesses to finance their operations. These securities may be secured or unsecured, may be issued by U.S. or foreign entities and may carry variable or floating rates of interest.

The fund may also invest up to 15% of its assets in mortgage-backed securities and asset-backed securities, including collateralized debt obligations. It may invest in Rule 144A securities. The fund may also invest in other short-duration fixed-income securities, such as floating rate loans and structured debt, and in cash or cash equivalents such as money market securities.

Securities in which the fund will invest will be U.S. dollar-denominated, although they may be issued by a foreign corporation or a U.S. affiliate of a foreign corporation, or a foreign government or its agencies and instrumentalities.

“We are pleased to add this exciting new actively managed income-seeking fund, offered in a cost-effective, investor-friendly ETF wrapper,” said Michael C. Buchanan, Deputy Chief Investment Officer of Western Asset. “WINC targets short-duration credit exposure while leveraging Western Asset’s global investment capabilities and strong risk management program, employing an active process that is both top-down and bottom-up to help identify attractive credit and income opportunities while actively managing risk. While always opportunistic, we are dedicated to providing investors with a long-term fundamental value discipline.”

“With WINC we can actively manage duration, sector and security selection – providing greater flexibility to respond to dynamic market conditions,” Mr. Buchanan said. “The fund’s exposures are 100% U.S.-dollar denominated. They can expand beyond investment-grade corporate bonds to include high-yield bonds, structured securities, emerging market debt and other sectors and securities.”

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