ETF giant State Street Global Advisors teamed up with DoubleLine Capital, the firm of famed bond investor Jeffrey Gundlach, to launch SPDR DoubleLine Total Return Tactical ETF (TOTL) last week.
The actively managed ETF is DoubleLine’s first foray into the ETF space.
One of the most respected bond fund managers in the market, Gundlach ran $12 billion TCW Total Return Bond Fund until 2009. At the time, Morningstar said it was in the top 1% of all funds invested in intermediate-term bonds for the five years ended in 2009.
Gundlach left TCW after a management dust-up and formed DoubleLine in 2010. He’s DoubleLine’s CEO and chief investment officer.
“It’s not a clone of any existing strategies,” said Jeffrey Sherman, a DoubleLine portfolio manager, during a webcast this week. Sherman will co-manage the ETF with Gundlach and firm President Philip Barach. “It’s a new product created just for this offering, but it draws upon the views of Jeff Gundlach and the DoubleLine team.”
While not identical to the firm’s flagship DoubleLine Total Return Bond Fund , ETF investors will be getting a deal. The ETF charges an expense ratio of just 0.55%, compared with the fund’s 0.72% fee for retail investors.
By going with a name-brand fund manager, State Street (NYSE:STT) is making a calculated effort to take advantage of the problems at Pimco. It looks like it wants to become the leading bond ETF in the country by taking on $2 billion Pimco Total Return Bond ETF (BOND).
BOND has seen more than $1 billion in outflow since Bill Gross, Pimco’s bond maven, left the firm in September. This caused BOND to fall to second-largest active bond ETF.
TOTL’s investment objective contains elements of both DoubleLine’s total return and core fixed-income strategies. The ETF aims to have a low interest-rate risk profile.
At the same time it expects to maximize returns through active allocation and selection of securities its analysis determines to be mispriced in the market.
DoubleLine Total Return Bond Fund has focused on mortgage-backed securities. But the ETF can hold any bond, including U.S. Treasuries, investment grade corporate credit, high-yield bonds, collateralized loan obligations, asset-based securities, bank loans and sovereign debt from both developed and emerging markets.
The portfolio must contain a minimum of 20% in mortgages, but it isn’t required to hold anything else. While high-yield, emerging market and CLO securities can each only take up as much as 25% of the portfolio, as much as 85% can be held in government bonds.
The duration of a single bond can range from one to eight years and no security can have a bond rating below BBB-.
State Street Getting Active
State Street, which has a reputation for running passively managed funds, has slowly moved into the active ETF arena. The new fund is its third active bond ETF and 10th overall.
While active equity funds have a hard time beating their benchmarks, the less transparent bond market creates more opportunities for managers to beat their index.
“Passive does best in U.S. equities, but in investment grade fixed-income 65% of managers outperform their benchmark,” said Dave Mazza, head of research at SPDR ETFs. “A skilled fixed-income portfolio manager can find inefficiencies across the market because it is illiquid and opaque.”