Columbia Threadneedle launches smart beta fixed income ETF

Oct 13th, 2017 | By | Category: Fixed Income

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Columbia Threadneedle has built out its smart beta ETF suite with the launch of the Columbia Diversified Fixed Income Allocation ETF (NYSE Arca: DIAL). DIAL provides a global multi-sector strategy, which is designed to serve as a core bond allocation.

Columbia Threadneedle launches smart beta fixed income ETF

Marc Zeitoun, head of strategic beta at Columbia Threadneedle.

The fund tracks the Beta Advantage Multi-Sector Bond Index, owned and calculated by Bloomberg Index Services, which uses a rules-based approach to invest across six fixed income sectors: US Treasuries (target weight of 10%), global treasuries ex-US (10%), US investment-grade corporate bonds (15%), US mortgage-backed securities (15%), US high-yield corporate bonds (30%) and emerging market sovereign debt (20%). According to Columbia Threadneedle, the strategy seeks to balance and enhance yield, quality and liquidity, providing consistent income with downside protection, regardless of the interest rate environment.

“As the market enters a new rate regime, investors may need to adjust their fixed income allocations and broaden their opportunity set,” said Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle. “Unlike traditional ETFs, strategic beta ETFs do more than track a benchmark. They incorporate active insights and are outcome-oriented.”

Marc Zeitoun, head of strategic beta at Columbia Threadneedle, notes that traditional fixed income indices – those weighted by capitalization – are less effective at fostering diversification, compared to newer smart beta indices. Specifically, he highlights the indices’ outsized weighting to sovereign bonds and high correlation between their two largest sectors, US Treasuries and US mortgage-backed securities.

“DIAL’s disciplined process is designed to seek more sources of income and avoid the overconcentration found in traditional fixed income benchmarks,” said Zeitoun. “Few strategic beta fixed income ETFs on the market today effectively address clients’ fixed income needs around yield, quality and liquidity in a thoughtful way.”

DIAL’s underlying index has an effective duration of 6.4 years. The majority of bonds represented in the index are rated either AAA (31.3%), BBB (27.3%) or BB (27.8%).

While the smart beta fixed income ETF market is in the early stages of adoption, a recent Columbia Threadneedle Investments survey of 220 financial advisors and investment managers found that over half would consider investing in a smart beta fixed income ETF. Respondents ranked expertise as an active fixed income manager and track record as the top considerations (both 20%) when purchasing a fixed income strategic beta product.

DIAL has a total expense ratio of 0.28%, however, Columbia Threadneedle has contractually agreed to waive its entire 0.28% management fee for a period of 90 calendar days, ending on 9 January 2018.

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