When it comes to smart beta exchange traded funds, many investors initially think of equity funds. However, ETF issuers are upping the smart beta ante in the fixed income universe, too.
The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) is one of the oldest and largest smart beta bond ETFs. PCY tries to reflect the performance of the DB Emerging Market USD Liquid Balanced Index, which tracks U.S. dollar-denominated government bonds issued by 22 developing economies.
However, the smart beta bond universe is growing, giving investors more opportunities to explore the potential of fundamental weighting with bonds.
“Relatively speaking, this is still a new frontier. Like their equity brethren, smart-beta bond ETFs employ factors other than market capitalization; in the case of fixed income, the criteria for weighting include credit quality, yield, and volatility,” reports Lewis Braham for Barron’s.
New smart beta bond ETFs include the FlexShares Core Select Bond Fund (NYSEArca: BNDC), which debuted in the fourth quarter.
The new fund will try to provide attractive risk-adjusted performance by investing in a portfolio of fixed-income securities and is designed to achieve optimal potential for return, according to the prospectus. Moreover, the active component will adjust to potential changes in interest rate levels, the shape of the yield curve and credit spread relationships while emphasizing liquidity and diversification.
As the ETF manages its exposure to interest-rate risks, the fund managers may take short or long positions in U.S. Treasury futures or transact in interest rate swaps, along with interest rate futures contracts.
Another new smart beta bond offering is the NuShares Enhanced Yield 1-5 Year U.S. Aggregate Bond ETF (NYSEArac: NUSA).
The smart beta bond ETF will largely include U.S. dollar-denominated investment-grade taxable debt securities with remaining term to final maturity of less than five years and at least one year until final maturity.
NUSA will help provide investors with “enhanced yield potential relative to the short-term, taxable investment grade fixed income market with comparable risk, a diversified core allocation in an income portfolio and exchange-traded liquidity and transparency,” according to Nuveen.
“Investors must consider how market dynamics affect smart-beta ETFs. A high-credit-quality ETF will lag behind in a bull market like today’s, as overleveraged cyclical companies rally,” according to Barron’s.
Other new smart beta bond ETFs include the the IQ S&P High Yield Low Volatility Bond ETF (NYSEArca: HYLV), IQ Enhanced Core Bond U.S. ETF (NYSEArca: AGGE) and IQ Enhanced Core Plus Bond U.S. ETF (NYSEArca: AGGP).
HYLV is a rules-based, fixed income ETF that specifically tries to target lower volatility exposure in high yield debt. The ETF seeks to capture a large portion of the attractive yield offered by high yield bonds, while reducing the volatility with the riskiest credits.
For more information on new fund products, visit our new ETFs category.