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02/26/15 05:00:50 PM


The active versus passive debate that drove investors to consider ETFs just got a little more complicated. DoubleLine Capital, the fixed income asset manager that is rapidly gathering assets, is partnering with ETF provider SSGA to launch the SPDR DoubleLine Total Return Tactical ETF (TOTL 50 NR) today. Below, we provide some perspective on how this fits into the ETF landscape and DoubleLine's mutual fund approach.

Through mid-February, according to iShares, the $19.6 billion of inflows to U.S. listed fixed income ETFs was the strongest ear to date asset gathering ever. iShares alone gathered 62% of the assets, aided by the breadth of their typically low cost, liquid ETFs across various bond investment styles, such as short-term investment grade or high yield . However, the common theme among iShares' fixed income ETFs is its strategy to replicate fixed income benchmarks rather than beat them. SSGA has just 34 fixed income ETFs, less than half the amount of iShares, but the lineup includes more recent product additions that partner with Blackstone and Nuveen.

The passive approach to ETF investing is increasingly popular with investors that struggle to find active managers that consistently outperform their peers and/or a common benchmark. According to the June 2014 S&P Dow Jones Indices Active vs Index Scorecard, the average active fund across various U.S. government, investment-grade corporate and high yield styles, lagged the respective Barclays index over three- and five-year periods. However, investment-grade intermediate-term funds were among the few styles where active management proved effective, with 66% and 61% outperforming the Barclays index over three- and five years, respectively.

PIMCO Total Return Active ETF (BOND 109 Underweight) launched in 2012 to much fanfare as a way for investors to get the best of the active fixed income world, but with better costs and liquidity. However, the $2.5 billion ETF had more than $1 billion of outflows since the late September departure of manager Bill Gross. The mutual fund version, which is not an exact match of the ETF, experienced even more outflows as investors lost confidence in PIMCO.

We think among the beneficiaries of PIMCO's leadership change is DoubleLine, particularly its funds that are lead or co-managed by Jeffrey Gundlach. The DoubleLine Total Return Bond Fund share classes (DLTNX 11 *****, DBLTX 11 *****) had collective net inflow of $7.9 billion in 2014, with inflows accelerating in the fourth quarter.

Meanwhile, The DoubleLine Core Fixed Income Fund share classes (DLFNX 11 ****, DBLFX 11 *****) had net inflows of $1.68 billion for the year.

DLFNX launched in June 2010 and subsequently generated relatively strong performance compared to mutual fund peers. Rising 4.0% on an annualized basis over the three-year period ended February 20, DLFNX outperformed its Lipper Core Plus Bond fund peer group by 25 basis points. Meanwhile, DLFNX rose 4.4% over the same three-year period, ahead of the 2.6% for its Lipper US Mortgage peers. Both DoubleLine funds have also outpaced the iShares Core US Aggregate Bond ETF (AGG Overweight) that seeks to replicate the popular Barclays Aggregate bond index and gained 2.6% over three years.

We believe TOTL is likely to be a combination of the two popular fixed income funds that Jeffrey Gundlach manages. According to the prospectus, the portfolio will strive to have at least 20% allocated to mortgage-backed securities, and may allocate as much as 25% to high yield debt and 15% to foreign-currency-denominated securities.

As of January 2015, DLFNX had 35% of assets in commercial and traditional mortgage-back securities, 21% in government securities, 12% in emerging markets, 11% in investment-grade corporates and 8% in high-yield corporates. Duration was 4.6 years, below that of AGG's 5.1 years. Meanwhile, its 30-day SEC yield of 3.3% was higher than the ETF's 1.8%

The separately run DLTNX had approximately 80% of its assets in mortgage bonds (commercial, agency pass-through, non-agency residential, etc.) and just 5% in Treasuries as of January. The fund had an even lower average duration of 2.5 years and a 30-day SEC yield of 3.5%.

Besides relative performance differences, the appeal of ETFs relative to mutual funds is lower expense ratios and the ability to trade on exchange with intra-day liquidity.

TOTL has a net expense ratio of of 0.55% that is comparable to BOND, lower than the retail DoubleLine mutual fund, but much higher than AGG's 0.08%.

We look forward to witnessing how TOTL performs and if the tight bid/ask spread will garner investor attention. S&P Capital IQ typically ranks ETFs within the first three months of its history based on performance, risk and cost factors.


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