WisdomTree unveils alternative income ETF

May 10th, 2021 | By | Category: Fixed Income

WisdomTree has launched a new ETF in the US providing exposure to alternative credit.

Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree.

Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree.

The WisdomTree Alternative Income Fund (HYIN US) has listed on Cboe BZX Exchange and is linked to the Gapstow Liquid Alternative Credit Index.

The index has been developed by Gapstow Capital Partners, a New York-based investment adviser specializing in public and private credit.

The index measures the performance of 35 publicly traded alternative credit vehicles (or PACs), defined as either business development companies (BDCs), real estate investment trusts (REITs), or closed-end funds (CEFs).

To be eligible for selection, a PAC must be listed on a US exchange, have a market capitalization greater than $100 million, and have an average daily trading volume in excess of $750,000. It must also have a permanent capital structure (i.e. not allow investors to redeem shares) and be perpetual in nature.

The methodology screens for PACs with stated objectives of investing primarily in high-yield corporate bonds, syndicated loans, private middle-market corporate loans, collateralized loan obligations, mortgage-backed securities, asset-backed securities, or real estate loans. PACs that invest primarily in traditional income sectors such as equities, real estate equity, or investment-grade corporate, sovereign, and municipal debt are not eligible for inclusion.

Eligible PACs are then sorted into five alternative income sectors with a PAC typically needing to invest at least 75% of its assets within a sector to be eligible under its classification. PACs that do not meet the requirements for any particular sector are classified under a sixth ‘Multi-Sector Alternative Credit’ sector.

Within each sector, PACs are ranked by market capitalization. The methodology selects the largest PACs while targeting a specific number of PACS from each sector: Private Corporate Lending (seven PACs), Public Corporate Debt (seven), Commercial Real Estate Lending (seven), Non-Agency Real Estate Debt (seven), Multi-Sector Alternative Credit (four), and Agency Real Estate Debt (three).

The PACs are equally weighted in the index which is rebalanced quarterly and reconstituted semi-annually with buffer rules helping to limit unnecessary turnover.

As of March month-end, approximately half of the index was allocated to REITs with the remaining weight split evenly between BDCs and CEFs.

It offered a yield of 8.04% which, against a backdrop of low interest rates, represents a significant pick-up over Treasuries (the ten-year US Treasury yield was 1.74%), corporate bonds (the comparable US junk bond yield was 4.42%), and equities (the S&P 500 yield was 1.45%).

But as well as the obvious income advantages, the fund offers the potential for diversification with the index exhibiting a correlation of just 0.10 relative to the Bloomberg US Aggregate Index. Its correlation to US high yield was 0.84, while it had a correlation of 0.72 relative to the S&P 500.

The fund comes with an expense ratio of 3.20% which consists of a 0.50% management fee and 2.70% in acquired fund fees and expenses.

Commenting on the launch, Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree, said: “Fixed income investors are facing some specific market challenges including historically low rates both in the US and on a global scale. One way for investors to search for income in a yield-challenged environment is through alternative credit which consists of debt and debt-based securities that have a higher risk-return profile than traditional high-yield bonds. With HYIN, we’re offering investors a vetted and thoughtful option to access exactly that.”

Thomas Skrobe, Head of Product Solutions at WisdomTree, added: “Historically, alternative credit markets have primarily been limited to institutional or ultra-high net worth investors typically through private fund structures but these solutions for alternative income will be a natural complement within model portfolios as global rates remain at historically low levels. That’s why ‘quality and income’ is one of WisdomTree’s core, ongoing investment themes and serves as a differentiating factor in our approach to both equity and fixed income solutions.”

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