AdvisorShares Launches New Low Duration Bond ETF [iShares Trust, PowerShares Exchange-Traded Fund Trust II]

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January 20, 2014 2:59pm NYSE:BIL NYSE:BKLN

AdvisorsharesThanks to the QE taper and rising bond yields, many in the fixed income world have been hit hard. 2013 was the first year in quite some time that losses were seen in bond portfolios, leading some to abandon the space, or at least focus on lower duration securities.

This look to lower duration bonds could be ideal for those who want to stay invested in bonds, but are worried about interest rate risks.  While a number of products have cropped up to give investors exposure to this market, a new actively managed fund that just hit the market might be an interesting option for some seeking a different way to play this segment.

The new fund comes to us from AdvisorShares, and trades under the name of the Sage Core Reserves ETF with the symbol of HOLD. The product will not follow an index, but looks to preserve capital while maximizing income.

What makes HOLD different?

While this dual mandate might sound similar to many others out there, HOLD looks to put a slight spin on the broad fixed income market. The managers have flexibility in terms of what types of fixed income securities they buy, as well as the credit quality too.

Additionally, though the average duration is expected to be less than one year, the fund does have the ability to buy slightly longer duration securities, and it can position itself along the yield curve based upon its market outlook. Managers can also target certain segments or securities, so the fund does look to be pretty nimble.

The product is also going to be pretty cheap for an actively managed fund, coming in at just 0.35% a year in fees. Still, this is somewhat pricey compared to other, index based funds in the ultra-short term space, as some have fees approaching just 10 basis points a year (also read Guide to the 25 Cheapest ETFs).

“The threat of rising interest rates and a strong investor appetite for yield may present limited options for efficient ways to access and manage cash holdings,” said Noah Hamman, chief executive officer of AdvisorShares in a press release. “We believe HOLD delivers a compelling investment solution with the benefits of a liquid, transparent and efficient actively managed ETF by leveraging Sage’s well-established track record and expertise as a fixed income manager.”

How does it fit in a portfolio?

The fund looks to be a solid choice for those who want to greatly reduce their interest rate risk, but don’t want to sacrifice yield opportunities completely. This is especially true considering that it focuses on a variety of short term bonds (both government and corporate) something that many other short-term securities do not do.

The fund will probably not be a great choice for those seeking truly robust yields, as Treasury bond purchases and the general low risk nature of bonds maturing in less than one year looks to keep current income relatively low. HOLD may also suffer from wider bid ask spreads, at least initially, though this could change if assets ramp up over the next few months. 

ETF Competition 

There are a number of short-term debt options currently trading in the market, including the ultra-short focused (NYSEARCA:GSY) and (NYSEARCA:BIL), though floating rate funds like (NYSEARCA:FLOT) and (NYSEARCA:FLRN) may also be considered competitors, due to their low duration risk (see all the Ultra-Short Term ETFs here).

Additionally, senior loan ETFs could be a foe, as these offer decent yields, though they are junk debt securities. A top name in this space is the PowerShares Senior Loan ETF (NYSEARCA:BKLN), a fund that has over $6.5 billion in AUM, and it has a 30-Day SEC yield approaching 4%.

Bottom Line

There are a lot of options in the short-term bond market, and it could be hard for HOLD to stand out. The fund may not have the same level of liquidity to start, while its expense ratio, though competitive, may be a bit high compared to some choices out there.

However, thanks to its actively managed approach and flexible strategy, it may be a better choice in the ultra-short fixed income market. If this technique holds up, this fund may become a favorite among investors seeking low risk bond exposure, though it will certainly have a tough battle in order to achieve a big asset base in this tough corner of the ETF world.

This article is brought to you courtesy of Eric Dutram.

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