Vident Financial, the Atlanta, Georgia-based issuer behind the two fairly successful equity products, recently launched its first bond focused exchange-traded fund. The Vident Core US Bond Strategy ETF (VBND) aims to protect investors’ capital through a transparent and systematic investment methodology.
The passively-managed VBND tracks the performance of the Vident Core US Strategy Index, a rules-based fixed-income index that seeks to provide current income while minimizing risks associated with this asset class including, inflation, counter-party default, star-manager and credit-migration risk.
The portfolio consists of US Treasuries, Treasury Inflation Protected Securities (TIPS), agency securities, investment-grade corporate bonds, mortgage-backed securities and high-yield corporate bonds.
VBND is well-diversified across different maturity ranges, which moderates the portfolio’s interest-rate risk and mitigates the potential for negative real returns in a rising interest rate environment. Securities maturing in 5-7 years get the maximum allocation (35.37 percent), followed by 7-10 years maturity (34.45 percent) and 3-5 years maturity securities (26.45 percent). Sector-wise, US Treasuries top the chart (51.17 percent), followed by mortgage-backed securities (28.17 percent) and investment-grade corporate bonds (14.51 percent).
The investment methodology involves improving exposure in both investment grade and high-yield corporate bonds by segregating companies with better creditworthiness, robust leadership and relatively stronger corporate governance.
The portfolio consists of 251 securities with AA-rated securities constituting 85.51 percent of them, indicating the fund will generally hold high-quality issues. The underlying index is rebalanced monthly and reconstituted quarterly.
The Federal Reserve has already noted interest rate hikes will be steeper when it is initiated though a sluggish Europe may force the central bank to raise short-term rates later than expected.
Nevertheless, investors should bear in mind short-term fixed-income ETFs are likely to be most vulnerable as the hike targeted toward the short-end of the curve. Thus, a spread-out approach with more concentration around the 7-10 years maturity might be the safest bet for now to hedge against a sudden steepening of the yield curve.
VBND’s value-driven approach has already generated significant interest among investors with total assets exceeding $233 million in just over a month. The fund has an annual expense ratio of 0.45 percent.
Disclosure: No holdingsContact Ulli