VCSH Vanguard Short Term Corporate Bond

Some believe that a ‘Great Rotation’ has begun in terms of asset class flows. While it is assumed that the biggest difference is from bonds and into equities, the real story has been the move from long-duration bonds and into shorter-duration ones instead.

These shorter duration securities have become increasingly popular among many investors due to their low interest rate risk levels, steadiness, and ability to generate income. While most have focused in on index-following choices in this space, more active picks could also be a great choice as well.

That is because many agree that managers can easily add value in the fixed income world where the market isn’t as liquid and pricing is not as easy. Thanks to this, many fixed income ETFs have found a big following in this space, while issuers have stepped up to the plate to give even more options in this segment (See 3 Multi-Asset ETFs for Juicy Yields and Stability).

The latest choice, which has just hit the market, comes to us from AdvisorShares and the fund manager Newfleet Asset Management. The product, the Multi-Sector Income ETF (MINC), looks to provide investors with active management in the short-term fixed income space, a segment that is increasingly in-focus for a number of investors.

MINC in Focus

The ETF looks to have an average duration between one and three years, potentially making the fund a low interest rate risk choice. This could be especially beneficial if rates suddenly rise thanks to Fed actions or other market forces, as these types of securities tend to do better in a rising rate environment.

In staying with this low risk theme, the portfolio looks to zero in on high quality investment grade debt. In fact, non-investment grade securities can only account for 20% of the portfolio, while non-American securities can only make up 30%, suggesting a heavy focus on domestic high quality bonds (read Forget T-Bonds, Invest in These Top Corporate Bond ETFs).

It should also be noted that the ETF looks to actively rotate among various bond sectors. This process seeks to overweight undervalued bond sectors, and shun those that are overvalued, a strategy that looks to be one of the primary ways that the managers add value.

In terms of yield, the current holdings’ yield to maturity is 2.7%, while the current yield is 3.2%. This is pretty good concerting the high quality focus of the ETF, and the ultra low duration which comes in at just 2.6 years.

This exposure isn’t cheap though as it will cost investors 75 basis points a year in total fees after waivers. While this is a bit heavy compared to the ultra-cheap funds in the category, it should be noted that this is relatively inexpensive for an active bond product, and especially so compared to much of the rest of AdvisorShares lineup (see 3 Excellent ETFs for Income Investors).

“The track record of Virtus and Newfleet in their actively managed mutual fund family is well established,” said Noah Hamman, chief executive officer of AdvisorShares in a press release. “In bringing MINC to market, we feel shareholders can benefit from their fixed income experience now accessible with the intraday liquidity and operational efficiency of an actively managed ETF. Additionally, we feel investors and financial advisors in search of yield with an actively managed short duration bond ETF may find MINC as a desirable alternative to other short-term investment options.”

How does it fit in a portfolio?

This ETF seems like it will be a good fit for those who buy into the experienced—and superb—track record of Newfleet in the bond space, and the concept of active management in this corner of the market in general. Investors who might be interested in MINC should also be prepared to pay a little more for this exposure though, as costs are definitely higher than rock-bottom.

The product could also be an interesting pick for investors who like the stability and safety of bonds, but are concerned about higher interest rates crushing returns. The short-term focus of this ETF should help to mitigate these worries, while the tactical approach should also assist in this goal as well.

However, it is important to remember that this shorter-term focus will likely result in a low yield. This may make the fund a poor choice for those seeking huge amounts of income, but this will obviously depend on the various bonds that are chosen for inclusion in the ETF (read AGG vs. BND Which Bond ETF Do You Choose?).

ETF Competition

Unfortunately for MINC, there are a wide range of bond ETFs currently on the market that are targeting the short end of the curve.  These include ETFs that are active and focus on ultra-short term debt like MINT or GSY, as well as index-following funds like VCSH or SCPB.

Obviously, none of these four are perfect competitors to the newly launched MINC as none have the combination of 1-3 year focus along with an active methodology. However, they all have, with the exception of GSY, billions in assets under management and thus a huge following. This could pose a problem for MINC as all four are also far cheaper than this new AdvisorShares product.

With this type of backdrop, outperformance will definitely be key for the Newfleet product and its quest to build up AUM. Luckily though, short-duration securities are in vogue for the time being, so a decent track record out of the gate could go a long way to this product having a successful launch.

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GUGG-EN SH DUR (GSY): ETF Research Reports
 
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PIMCO-E SMETF (MINT): ETF Research Reports
 
SPDR-BC ST CB (SCPB): ETF Research Reports
 
VANGD-ST CRP BD (VCSH): ETF Research Reports
 
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