Mark Salzinger, editor of The Investor’s ETF Report, looks at the two largest actively managed bond ETFs, explaining why both deserve a place in income investor portfolios.
PIMCO Total Return Active (BOND) and SPDR DoubleLine Total Return Tactical (TOTL) both have impressive pedigrees but recently have lagged the broader bond market.
Here, we look at their recent performance and consider their prospects, which we think are as bright as those of any other bond ETF.
We don’t think the recent underperformance at BOND has anything to do with the departure of Bill Gross; the fund’s strategy remains the same.
The fund owns primarily investment-grade bonds of all types, selected based on fundamental attractiveness and their fit within the broader macroeconomic and bond market outlooks developed by PIMCO’s portfolio managers and analysts.
Furthermore, the managers now in charge of BOND and its mutual fund sibling, Scott Mather, Mark Kiesel and Mihir Worah, are seasoned hands.
Much of BOND’s recent underperformance can be attributed to the portfolio’s overall sensitivity to changes in interest rates and outsized positions in mortgages and emerging markets, both of which have been drags on returns.
None of those positions strike us as unreasonable. Occasional underperformance is to be expected in any actively managed fund, no matter how well it performs over longer periods.
We find much to like in BOND’s investment philosophy, which favors areas that appear undervalued and likely to perform well in the future.
Recently, this has meant favoring Treasury inflation-protected securities and non-agency-issued mortgages. BOND levies a 0.55% expense ratio and has an SEC yield of 2.9%.
SPDR DoubleLine Total Return Tactical has held up better recently than BOND; the fund is managed by Jeffrey Gundlach and his DoubleLine team, which have built long-term records of success.
Mortgage-backed securities and related debt instruments make up the bulk of TOTL’s portfolio (recently about two-thirds); in addition, it spreads the rest of its portfolio among emerging markets, Treasuries, corporate bonds and bank loans.
As with BOND, coupling narrower exposure to corporate bonds with increased exposure to emerging markets also has dragged on returns—as has a lower average duration (recently just 3.8 years).
Like PIMCO, DoubleLine combines macroeconomic analysis and individual security selection to build portfolios. TOTL focuses on bonds that appear to be mispriced relative to the stability of the stream of payments due from the bond.
We see no reason to think that TOTL’s recent mediocrity is a permanent feature. TOTL’s expense ratio is 0.55%, identical to BOND’s, and its SEC yield is 3.1%.
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By Mark Salzinger, Editor of The Investor’s ETF Report
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