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A number of ETF issuers have rolled out new products lately while some are waiting in the queue for an approval. Among the new filings and offerings, some have a fresh theme, and some still consider the basics but with a tweak. Either way, issuers seem to be leaving no stone unturned in terms of new ETFs.  

This was the case for WisdomTree which recently outlined an active bond ETF in the name of WisdomTree Unconstrained Bond Fund. The product has been filed at a somewhat poor time for the bond world as evident by the latest Bloomberg headline “U.S. Bond Sentiment Is Worst Since Disastrous ’09”. Probably, that is why, the issuer prepared its bond ETF in such a manner so that its product can live up to investors’ expectation in what could be a very difficult bond market.

Proposed Fund in Detail

This new ETF looks to give investors broad exposure to the global dollar denominated bond market in an attempt to hedge its currency exposure. The fund looks to focus more on developed and emerging market bonds. The bonds include both investment grade and junk bonds.

The fund will cap any single corporate issuer’s exposure at 10% of the total portfolio, any single sovereign issuer’s focus at 25% and any specific country’s tilt at 30% of the basket, excluding U.S. exposure, per the prospectus. The fund has the right to invest up to 20% of its net assets in securities outside of debt. In terms of weighted effective duration, the product looks to stay within a duration range of negative five years to ten years.

It is worth noting that a negative duration indicates that the fund’s price will rise when rates rise. A negative five years duration means that the fund is likely to jump by 5% for every 1% rise in interest rates and vice versa. However, being an active fund, the product can swiftly adjust its duration depending on the changes in market movements (read: WisdomTree Launches Two High Yield 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. As the name suggests, the ‘unconstrained’ nature of the bond fund can make it an investors’ darling in the present environment which can take a sharp turn anytime in 2015 (read: Top ETF Stories of 2014 Worth Watching in 2015).

U.S. Treasury bonds are in a tough juncture right now. On the one hand, treasuries tasted sweet success in 2014 after three years of low inflation and high demand, while on the other; the Fed’s rate hike issues will lead the segment to extreme upheaval in 2015. If this was not enough, duration will play a major role at this point of time. Flattening of the yield curve quelled short-term bond ETFs in 2014 while steepening of the curve beat the long-term bonds the year before.

Investors should note that the basket bears a global perspective. With most developed nations being in a mood to support easy money policies for longer, the product can be an enticing option to cash in on low-yields.
In such a situation, this proposed product calls for extreme levels of variety. Wide-ranging duration as well as investment grades should cushion the portfolio from interest rate risks as well as credit risks.

ETF Competition

The product seems to be quite innovative in nature as the issuer seeks to pack several features into one product. In any case, the broad international bond market is still mushrooming though we have seen a surge in interest over the past few years (read: Best and Worst Bond ETFs Of 2014).  

The most popular funds in the emerging market bond ETF space right now includes (EMB) while foreknown international funds include Vanguard Total International Bond ETF (BNDX), SPDR Barclays International Treasury Bond ETF (BWX), S&P/Citigroup International Treasury Bond Fund (IGOV) and Madrona Global Bond ETF (FWDB).

However, given the product’s unique methodology and unrestrained objective, it should not face any difficulty in hogging investors’ attention, assuming it gets approval soon.   

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ISHARS-JPM EM B (EMB): ETF Research Reports
 
VANGD-TTL INT B (BNDX): ETF Research Reports
 
SPDR-BC INTL TR (BWX): ETF Research Reports
 
ISHARS-IN TB (IGOV): ETF Research Reports
 
MADR-FWD GLBL (FWDB): ETF Research Reports
 
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