5 Smart-Beta Bond ETFs For Smart Fixed Income Investors

| May 30, 2018

There are more smart-beta bond ETFs to consider than many investors may think

March was a rough month for smart beta exchange-traded funds (ETFs) as assets under management for alternatively weighted ETFs declined 0.96% on a global basis, but smart beta funds still represent a significant percentage of the overall ETF universe.

Importantly, that March figure represents assets lost to equity market gyrations and volatility. Data suggest investors still allocated capital fundamentally weighted ETFs in March.

“Smart Beta ETFs and ETPs listed globally also gathered $4.65 billion in net inflows, the highest monthly amount since January 2018 when net inflows were $9.79 billion,” according to ETFGI.

Currently, there are nearly 1,300 smart beta ETFs listed around the world, but more and more advisors and investors are wondering where the smart beta bond ETFs are. Some such funds have been around awhile and some have proven successful with ETF users. Investors just need to know where to look. This quintet can help start that process.

Smart-Beta Bond ETFs: Vident Core U.S. Bond Strategy ETF (VBND)

Expense ratio: 0.43% per year, or $43 on a $10,000 investment.

Traditional bond ETFs weight holdings using market value of debt issuances, meaning the issuers with the highest debt levels receive the largest weights. The Vident Core U.S. Bond Strategy ETF (NASDAQ:VBND) pursues a different, multi-factor approach.

VBND’s “strategy employs a systematic, rules-based, and transparent process that seeks to allocate capital among core fixed income sectors as well as high yield and Treasury Inflation-Protected Securities (TIPS). The Strategy Index also seeks to improve exposure to bond issuers within the investment grade and high yield corporate sectors by identifying companies with stronger relative governance, leadership and creditworthiness factors. The Strategy Index is rebalanced monthly and reconstituted quarterly,” according to a statement issued by Atlanta-based Vident.

Home to roughly $600 million in assets under management, VBND has 28 holdings, nearly two-thirds of which are rated AA. The average maturity of those holdings is 7.41 years.

VBND’s 30-day SEC yield is 3.25%.

Smart-Beta Bond ETFs: IQ Enhanced Core Plus Bond U.S. ETF (AGGP)

Expense ratio: 0.39%

Investors looking for an alternative avenue to income can consider the IQ Enhanced Core Plus Bond U.S. ETF (NYSEARCA:AGGP), which recently turned 2 years old. AGGP follows the IQ Enhanced Core Plus Bond U.S. Index and is structured as an ETF of ETFs, meaning its underlying holdings are other ETFs.

Those funds give AGGP investors exposure to Treasuries, mortgage-backed securities (MBS) and investment-grade corporate bonds. AGGP can also allocate some of its weight to emerging markets debt and junk bonds.

What makes AGGP a smart beta bond fund is its use of the momentum factor. The fund measures momentum “by comparing a short-horizon (45-day) moving average of returns to a longer-horizon (90-day) moving average of returns, while taking into account recent volatility of each sector,” according to the issuer.

AGGP holdings include cheap, well-known Vanguard funds. This smart-beta ETF had a 30-day SEC yield of 3.3% at the end of the first quarter.

Smart-Beta Bond ETFs: Xtrackers Low Beta High Yield Bond ETF (HYDW)

Expense ratio: 0.25%

The Xtrackers Low Beta High Yield Bond ETF (NYSEARCA:HYDW) debuted in January, making it one of the newest smart-beta funds highlighted here. However, the fund has rapidly gained a following with high-yield bond investors as highlighted by its nearly $137 million in assets under management — enough to make one of the most successful bond ETFs to debut this year.

High-yield bonds can see increasing volatility and decreasing performance as interest rates rise. HYDW can help income investors stay involved in the asset class. While the sample size is admittedly small, HYDW is outperforming the largest traditional junk bond ETF over the past 90 days.

HYDW holds 420 bonds. As a low beta, high-yield offering, HYDW’s holdings, broadly speaking, sport lower yields than are found with standard junk bond funds. On the upside, the fund’s holdings usually have higher credit quality than higher-yielding peers.

Smart-Beta Bond ETFs: iShares Edge U.S. Fixed Income Balanced Risk ETF (FIBR)

Expense ratio: 0.25% per year, or $25 on a $10,000 stake.

The cornerstone behind the iShares Edge U.S. Fixed Income Balanced Risk ETF (CBOE:FIBR) is equally spreading interest rate and credit spread risk. In plain English, FIBR does not force investors to decide between credit and rate risk, a decision that investors do face with many aggregate bond funds.

FIBR has an effective duration of 5.4 years, giving the fund intermediate-term status. Nearly 40% of FIBR’s holdings carry AAA ratings and another combined 64.7% are rated A or BBB.

“FIBR invests only in asset classes that have historically had high risk-adjusted returns,” said BlackRock. “And FIBR tilts towards higher yielding asset classes and securities. These traditional active strategies are just wrapped up into an index and implemented consistently through time in an ETF.”

Smart-Beta Bond ETFs: Goldman Sachs Access High Yield Corporate Bond ETF (GHYB)

Expense ratio: 0.34%

The Goldman Sachs Access High Yield Corporate Bond ETF (NYSEARCA:GHYB) has a limited track record, having debuted just last September. GHYB follows the Citi Goldman Sachs High Yield Corporate Bond Index and aims to steer clear of high-yield issuers with deteriorating fundamentals.

This smart-beta bond ETF’s effective duration is 3.91 years and 94% of its holdings are rated BB or B. GHYB’s index “employs a simple, transparent process that is designed to identify an investible universe, then eliminates issuers with relative deteriorating fundamentals to offer exposure to existing sector or market beta,” according to GSAM.

While GHYB dodges the riskiest junk bonds, it does not cheat investors when it comes to yield. The fund had a 30-day SEC yield of 5.5% at the end of the first quarter.

As of this writing, Todd Shriber does not own any of the aforementioned securities.

 

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