AdvisorShares, the Maryland-based ETF issuer, has long been a leader in active ETFs, thanks to its 15 funds in the space. The company isn't afraid to try novel concepts in this market either, as evidenced by a series of funds employing novel techniques including long-short, float-shrink, and high yield-centric strategies.
While a few of the funds have become big hits with investors, a number of failed to attract a decent following. Possibly, this could be due to the relatively high fees of the AdvisorShares lineup, as the average expense ratio comes in well over 1.5% (see Three Outperforming Active ETFs).
However, this could be changing in the near future, as evidenced by a recent filing update that the company made to a proposed ETF. This new product, the Newfleet Multi-Sector Income ETF (MINC), looks to use an active strategy while charging investors a surprisingly low 75 basis points a year in fees.
The breakdown for this low expense ratio comes in with 65 basis points a year for the management fee and 12 basis points as other expenses, with a two basis point waiver to bring the total down to 0.75%. While this may be higher than many other passive ETFs currently trading, if this fund is ever brought to market, it will crush most active ETFs by a pretty wide margin, at least for those in the broad bond space.
While many of the key details were available in the filing, including this low expense ratio and the proposed ticker symbol, investors are likely keying in on the product's proposed methodology to see how it matches up against other products that are already on the market. Seemingly, the sub-advisor, Newfleet Asset Management, will employ a multi-faceted approach in order to zero in on undervalued areas of the fixed income world (read PIMCO Files for Three More Active Bond ETFs).
The proposed fund will focus in on investment grade securities, although it will have the freedom to also buy up RMBS, emerging market high yield bonds, corporate high yields, CMBS, and muni bonds, among others. Clearly, the fund will have pretty much a free hand to find the best values in the bond world in order to hopefully provide investors with a solid yield at a reasonable price.
Investors should also note that the average duration will be pretty light, between one and three years, so default risk shouldn't be too much of an issue. Furthermore, although the security does have the freedom to invest in any of the above asset types, only 20% can be invested in securities that are below investment grade, suggesting that a high quality portfolio will probably result in the still-in-registration MINC.
Active Bond ETF Competition
In terms of competition, the active ETF world is still pretty sparse and is especially so in the bond world. With that being said, many people believe that active management can potentially provide more value in bonds as opposed to equities, as fixed income securities aren't nearly as liquid or easily traded, making a watchful eye of a portfolio manager that much more important (see Top Four High Yield Bond ETFs).
Thanks to this, the space could see an increased level of competition in the coming years beyond the current 20 ETFs that occupy the broad active fixed income space. Yet of this group, a few could certainly pose a threat to MINC, if it is able to ever hit the market.
Ironically, two of the biggest competitors could actually come from fellow AdvisorShares products including the Peritus High Yield ETF (HYLD) and the Madrona Global Bond ETF (FWDB). Both of these funds employ an active management technique in order to select bonds/bond segments, and thus could be big competitors to an eventual launch by MINC (read The Best Bond ETF You Have Never Heard Of).
While HYLD will definitely be a high yield pick in the active bond landscape, FWDB looks to probably be a bigger foe thanks to its more diversified holdings picture and higher focus on investment grade securities, much like MINC. Still, FWDB currently sees a paltry level of interest and its expense ratio, at 1.15%, could open a big hole for the proposed Newfleet income product, should it pass SEC muster and find its way onto the market at some point this year.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Follow @Eric Dutram on Twitter
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report