GSAM, BlackRock, JPM Crowd into Smart Beta Bond ETFs
A flurry of factor-based fixed income funds is coming as
asset managers see untapped market.
There are few factor-based fixed income funds on offer, but
asset managers including Goldman Sachs Asset Management,
BlackRock, and J.P. Morgan Asset Management are racing to
change that. Factor-based funds, often called smart beta,
invest via rules built into an algorithm that doesnt
require humans to intervene once it is set in motion. Smart
beta equity funds, which provide exposure to investing styles
such as value or low volatility, are one of the fastest growing
asset management categories. Institutional and retail investors
are flocking to smart beta in the equity world as an
alternative to passive products that simply track market
capitalization-weighted indexes such as the Standard &
Passive fixed income is now dominated by funds that track
these type of standard benchmarks, including BlackRocks
LQD, an investment grade corporate bond ETF, and State Street
Global Advisors JNK, a high-yield fund.
Goldman Sachs Asset Management, which recently launched a
smart beta investment grade corporate bond ETF, will soon roll
out a high-yield product and an emerging markets sovereign debt
ETF denominated in local currency.
Steve Sachs, GSAMs head of capital markets, notes that
popular indexes for passive fixed-income investing the
Bloomberg Barclays U.S. Aggregate, for example
werent constructed for investment purposes. In these
market cap-weighted indexes, the more debt a company issues,
the higher its representation in the benchmark.
Thats not necessarily the best measure of what is a
better bond, Sachs says. For its new corporate bond ETF,
GSAM is tracking an index it developed with Citigroup.
GSAM uses the banks proprietary equity research to
take a fundamental view on the health of companies that will
ultimately make up the Citi Goldman Sachs Investment Grade
Corporate bond index. Once it has screened companies based on a
number of characteristics, it excludes the bottom 10 percent.
Thats economically intuitive, Sachs says. In
fixed income as opposed to equities with unlimited
upside he points out that investment success is often
determined by what is not in the portfolio. Typically,
investors simply collect interest on a bond and then receive
the principal back when it matures. Avoiding the worst
companies reduces the risk of an investor holding a worthless
Is there a better way to index? We think there
is, Sachs says.
J.P. Morgan Asset Management and BlackRock have also made
smart beta bets in fixed income. This week BlackRock launched
the iShares Edge Investment Grade Enhanced Bond ETF and the
iShares Edge High Yield Defensive Bond ETF. The move gives it a
total of four smart beta bond funds. The new high-yield product
aims to be more defensive than the broader market and whereas
the investment-grade funds aims to offer potential for
higher yield. The funds are the first to use indexes built with
BlackRocks own intellectual property, analytics, and
modeling, the company said.
Andrew Ang, BlackRocks head of factor investing
strategies and a prominent factor researcher, says the firm
will continue to study smart beta in fixed income and
potentially create additional products. All of the same
factors that are present in equites are also present in fixed
income. But the most important effects or factors are rates and
credit, so its a challenge to tease out other factors
such as value or momentum. But its clearly
possible, Ang says.