Active Bond ETFs

Active bond funds are awful.  But the ETFs are even worse, because people think that they are transparent, and thus, less likely to own undesirable assets.  Which, in theory, they are.  But how often do those who own or those who recommend those products actually go check and see what they are made of?  And when they do, how much can they really find out?

Part of the reason that people use active bond funds or ETFs rather than index based products is because bond indices have a lot of built in issues.  It’s difficult to make a representative index that is both complete and can actually be owned.  Bond index rules typically cause a lot of drag on return because other market participants can easily front run the required trades.  This is true of equity indices as well, but bonds are worse, because the bond market is less liquid, in general, and the rules are just not conducive to efficient trading.

But thanks to Bill Gross, people expect bond funds to have some kind of stellar returns, not the very low, conservative, boring, low volatility kind of returns that many bonds actually have.  His bond mutual fund made all kinds of risky investments, and getting outsize returns, and it got huge.  Which made it mainstream and acceptable.  The size of that fund removed the career risk from recommending it.  But it was not “bonds” in the traditional sense of portfolio diversification.  Additionally, some of his returns were due to insider trading action during the crisis, when he was trading on behalf of the Fed.  Disgusting.

Now, Gundlach has started an ETF with the same sort of goals.  From

Many have said that a fixed-income investor today needs to be tactical to survive, and active management is one way to do it. State Street’s ETF head Jim Ross himself has told recently there’s opportunity in the active management space, particularly in fixed income.

“I think one of the most important new funds of 2015 will be the SPDR DoubleLine Total Return Tactical ETF,” Matt Hougan, president of, recently said in an outline of his top ETF picks for 2015.

“Gundlach has built a company from scratch into a $55 billion juggernaut in a few short years, and has delivered solid performance,” Hougan said, pointing out that Gundlach’s Core Fixed Income mutual fund has outperformed the Barclays Aggregate by an annualized 2 percent over the past three years.

“What’s exciting about this launch is that it brings the best of active management to the ETF space,” he added.

TOTL will be part of a “master feeder” structure, in which the fund invests most of its assets in a corresponding “master fund.” That master fund is a separate mutual fund that has an investment objective, investment policies and risks substantially identical to the ETF, according to the prospectus.

 The portfolio will strive to have at least 20 percent allocated to mortgage-backed securities, and may allocate as much as 25 percent to high yield debt at any point, and 15 percent to foreign-currency-denominated securities, according to the prospectus.

Re-read that last paragraph.  This is a lot like BOND.  Will they also hold 30-40% cash?

Also important to note, the ETF will invest in a mutual fund.  Which means that it is NOT transparent.  And they are comparing this incredibly risky portfolio to AGG.

Unconscionable.  The purveyors of this crap are only one tiny step better than Madoff.  Consumers think bonds are safe.  This fund is anything but safe.   It does not diversify a portfolio of equities.



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