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Bond investments, especially the long-dated ones, saw stellar gains in 2014 thanks to the dominance of risk-off trade sentiments in the wake of global growth concerns. However, the trend might shift this year as the Fed plans on ending the prolonged low-interest rate era, sooner-or-later, depending on the progress of the economy.

All these have propelled investors to reshuffle their portfolio in advance and take a stance to fight to the likely rise in interest rates. Issuers are also not sitting idle as every now then they are coming up with novel bond ETF ideas which can successfully allay rising rate concerns plus offer high yield and decent return to the investors.

In this pursuit, State Street launched a new actively managed bond ETF in late February in association with bond master Jeffrey Gundlach’s DoubleLine Capital. The fund is called SPDR DoubleLine Total Return Tactical ETF (TOTL) (read: 5 Very Successful ETF Launches of 2014).

TOTL in Focus

TOTL, an actively managed fund, has its foundation based on the principles of the DoubleLine’s sought-after investment research. The product seeks total return, while emphasizing income by investing in a global portfolio of fixed income securities of various maturities and ratings, though only 10% of the portfolio goes to the international arena.

The fund looks to utilize various investment strategies in a broad array of fixed income sectors. It puts about 52% of assets in mortgage-backed securities followed by 13.5% invested in bank loans and 10% in emerging markets. High-yield corporate bonds and investment grade corporate bonds also account for about less than 10% weight in it. The fund charges 55 bps in fees.

The fund has a modified adjusted duration of 3.65 years while its current yield stands at 4.86% (as of February 27, 2015). The fund has about 155 bonds in its portfolio (read: Time for Junk Bond ETFs?).

How Does it Fit in a Portfolio?

The product could be an interesting choice for investors seeking exposure to the fixed income market while limiting interest rate risk and offering considerable fixed income. With no more than four years of effective duration, the product appears less interest-rate sensitive in a rising rate environment.

Its heavy tilt on mortgage-backed securities (MBS) offers investors higher yields than the Treasury bonds with similar credit rating. Moreover, as the demand for residential and commercial real estate rises, mortgage financing companies are bound to see an increase in their asset books in the near future (read: Guide To MBS ETF Investing).

The ETF aims to provide income potential by every possible means of MBS, senior loans, high-yield corporate and emerging market bonds. Since the historical correlation between high-yield securities and traditional fixed-income instruments is low, the addition of high-yield securities to a well-diversified portfolio has the potential to improve returns and reduce overall portfolio volatility due to diversification benefits (read: Senior Loan ETFs: The Best Bet for Rising Rates?).

ETF Competition

At present, the total bond market ETF space is teeming with options with Vanguard Total Bond Market ETF (BND) leading. BND rules the space with an AUM size of $26 billion and an average trading volume of more than 3,000,000 shares a day. Next is Core Total U.S. Bond Market ETF (AGG) which oversees an asset base of $24 billion and tracks the Barclays Capital U.S. Aggregate Bond Index.

All these ETFs do not emerge as direct peers to TOTL.  Per the issuer, TOTL joins conventional fixed income investment sectors of the Barclays US Aggregate Bond Index and fixed income asset classes outside the index through an active approach. However, an active RiverFront Strategic Income Fund (RIGS) might pose threat to TOTL.

RIGS is also composed of U.S. and foreign government and corporate debt, high yield bonds, emerging market debt, MBS, muni bonds and preferred securities and intends to offer a higher yield. The fund charges 22 bps in fees.  

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SPDRR-DBLN TR T (TOTL): ETF Research Reports
 
VANGD-TOT BOND (BND): ETF Research Reports
 
ISHARS-CR US AG (AGG): ETF Research Reports
 
RIVR-STRAT INCM (RIGS): ETF Research Reports
 
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