Rareview Capital debuts two active fixed income ETFs targeting CEFs

Oct 23rd, 2020 | By | Category: Fixed Income

Connecticut-based investment adviser Rareview Capital has introduced its first ETFs with the launch of two actively managed fixed income funds that seek a total return with an emphasis on current income.

Neil Azous, Founder & CIO at Rareview Capital

Neil Azous, Founder & CIO at Rareview Capital.

The Rareview Dynamic Fixed Income ETF (RDFI US) provides exposure across multiple bond sectors globally, while the Rareview Tax Advantaged Income ETF (RTAI US) offers tax-advantaged income by targeting municipal debt.

The funds have listed on Cboe BZX Exchange and each been seeded with $2.5 million.

According to Rareview, the ETFs combine the traditional benefits of fixed income with the potential for non-traditional yield and higher returns by primarily utilizing listed closed-end funds (CEFs) to execute the strategies.

CEFs often trade at a premium or discount to their net asset value (NAV) as a result of market technicals and sentiment. Rareview will attempt to exploit these pricing irregularities through active management, based on proprietary quantitative models.

Neil Azous, Founder & CIO at Rareview Capital, commented, “With interest rates hovering near zero, fixed income investors have been put a tough spot if they’re looking for high, consistent yield without taking undue risk. That’s why we’re thrilled to be launching RDFI and RTAI. Both ETFs seek to provide investors with consistent, high monthly income, even in the context of challenging market conditions.

“Both of our new ETFs seek to harness the potential of fixed income CEFs. The advantages of closed-end funds, including the higher yield and the potential for alpha generation, may help an investor achieve their goals.”

Investment strategy

The Rareview Dynamic Fixed Income ETF uses top-down macro analysis to select CEFs across a broad range of fixed income sectors including government bonds, investment-grade or high-yield corporate bonds, municipal bonds, convertible bonds, leveraged loans, mortgage-backed securities, and emerging market debt.

As of 21 October, the ETF had 19 holdings with an effective portfolio duration of 4.6 years and a weighted average discount to NAV of -10.64%.

The Rareview Tax Advantaged Income ETF, meanwhile, focuses exclusively on municipal bond CEFs, a strategy that may be particularly attractive to investors in high tax brackets. Rareview notes that the tax-equivalent yield on the S-Network Municipal Bond Closed-End Fund Index for investors in the 37% tax bracket was 7.0% (as of 31 August) compared to just 1.71% for the Bloomberg Municipal Bond Index.

As of 21 October, the ETF had 8 holdings with an effective portfolio duration of 4.6 years and a weighted average discount to NAV of -12.65%.

While CEFs are the primary investment target, the ETFs may also allocate up to 30% of their portfolios to other fixed income ETFs. Furthermore, the ETFs may also employ derivatives to protect against significant rises in volatility or interest rates.

As is typcial of ETFs that focus on CEFs, the funds come with hefty price tags – largely due to the fees associated with the acquired funds. The Rareview Dynamic Fixed Income ETF comes with an expense ratio of 2.37%, while the Rareview Tax Advantaged Income ETF costs 1.91%. Of course, these fees need to be weighed up against the discount to NAV of the acquired funds and the potential for delivering alpha.

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