Fund Expert Eyes Unconstrained Bond ETFs

07/14/2016 9:00 am EST


David Fabian

Managing Partner, FMD Capital Management

Unconstrained bond funds are a relatively new category; the concept is to create an actively managed ETF with no barriers to sector exposure, position size, interest rate correlation, duration, or credit quality, notes David Fabian, editor of The Flexible Growth and Income Report

Put simply – the gloves are off. The fund manager has discretion to go wherever they feel offers the most value to generate income, manage risk, and achieve capital appreciation. That type of autonomy can offer value to the investor.  But it also comes with its own unique risks as well.

Among  actively managed ETFs, three have unconstrained mandates: WisdomTree Western Asset Unconstrained Bond Fund (UBND), RiverFront Dynamic Unconstrained Income ETF (RFUN) and Newfleet Multi-Sector Unconstrained Bond ETF (NFLT).

Each is managed by a team of strategists that invest according to their unique views on the interest rate and credit markets. 

The outlook of the manager and construction of the portfolio are two key characteristics that must be thoroughly researched when evaluating these funds.

Fortunately, the portfolio holdings are required to be posted to the fund providers website on a daily basis for complete transparency. The managers also often compile monthly or quarterly commentary as to what challenges or opportunities they see on the horizon.

NFLT is the largest of this group with $173 million in total assets. The ETF is highly diversified with nearly 400 individual fixed-income securities. They also charge the highest net expense ratio at 0.80%. 

Unconstrained bond funds can also get into esoteric markets as well. For instance, UBND currently owns both long and short currency holdings in its portfolio as well as short positions in US Treasury futures contracts. 

Being able to keep all those varying hedges in place can become expensive and difficult to track over long periods of time unless the manager is on the right side of the market.

Two other funds that deserve an honorable mention in this discussion are the AdvisorShares Newfleet Multi-Sector Income ETF (MINC) and RiverFront Strategic Income Fund (RIGS).  Both use a multi-sector approach with broad leeway in their portfolio exposure. 

For those seeking exposure to active management, these funds can supplement core bond exposure as a tactical holding. It’s also worth keeping an eye on the manager and strategy regularly to ensure the fund is meeting your expectations as it changes over time.

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By David Fabian, Editor of The Flexible Growth and Income Report

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