First Trust Advisors has launched a new actively managed ETF – the First Trust TCW Unconstrained Plus Bond ETF (UCON US) – on NYSE Arca. Sub-advised by TCW Investment Management, UCON may invest in fixed income securities of any type or credit quality.
Ryan Issakainen, senior vice president, ETF strategist at First Trust Advisors.
Unlike index-based strategies, unconstrained strategies provide a flexible, adaptable, “go anywhere” approach. This allows the ETF to capture TCW’s highest conviction ideas in a flexible strategy that identifies opportunities in response to evolving market conditions. The fund may adopt a conservative allocation in uncertain periods or move tactically into higher-risk opportunities as conditions warrant. It can also adapt its sensitivity to interest rates (duration) depending on the economic backdrop.
While the fund may invest across any type of fixed income security, there are some limitations on the proportion of portfolio value assigned to various segments. These include a maximum 70% in high yield (or “junk”) securities, up to 60% in emerging market securities, and up to 50% in securities denominated in foreign currencies. Additionally, the weighted average portfolio duration will not exceed ten years.
TCW’s fixed income management philosophy applies a long-term value discipline emphasizing fundamental bottom-up research, which seeks to identify securities that are undervalued and offer a superior risk/return profile. The objective of the ETF is to maximize total returns over the long term.
The fund has an expense ratio of 0.75% due to a contractual fee waiver in place until at least 5 June 2019. Its gross expense ratio is 0.85%.
“We are very pleased to expand our relationship with First Trust in launching the First Trust TCW Unconstrained Plus Bond ETF,” said Stephen Kane, group managing director at TCW. “Our portfolio management team takes a full-cycle, value approach to managing fixed income. With a high level of flexibility to manage the portfolio around duration, sector and quality exposures, we plan to focus the portfolio on our best research ideas, while seeking to protect investors in difficult markets as well as achieve attractive returns in environments where we see compelling valuations.”
“This actively-managed ETF provides another tool for investment advisors to build portfolios for their clients, leveraging the best thinking of the world-class team at TCW,” added Ryan Issakainen, senior vice president, ETF strategist at First Trust. “As interest rate volatility has returned this year, we believe professional management for fixed income assets is more important than ever.”
In addition to Stephen Kane, the fund’s portfolio management team from TCW includes Tad Rivelle, chief investment officer, co-director – fixed income; Laird Landmann, co-director – fixed income; and Bryan Whalen, group managing director. The portfolio managers are jointly responsible for the day-to-day management of the fund.
The fund’s total fees of 0.75% is pricier than many other unconstrained bond ETFs currently on the market such as the $2.0 billion PIMCO Active Bond ETF (BOND US), expense ratio – 0.61%; the $3.2bn SPDR DoubleLine Total Return Tactical ETF (TOTL US), expense ratio – 0.55%; and the $160 million JP Morgan Global Bond Opportunities ETF (JPGB US), expense ratio – 0.55%.
Whether UCON’s fees may be justified by future outperformance remains to be seen; however, TCW’s unconstrained bond mutual fund – the TCW Total Return Bond Fund – has achieved a significant 6.3% per annum return over its 25-year history.