Inside WishdomTrees's Unconstrained Bond Fund

Innovation is a fad in the ETF industry. Most of the issuers are coming up with a fresh theme, not only in equities but also in the fixed income market. Recently WisdomTree launched an active bond ETF in the name of WisdomTree Unconstrained Bond Fund (UBND), which looks to be an addition to the long list of smart-themed products.

After all, a unique approach in the fixed income investing is a prerequisite at the moment as the Fed is preparing for policy normalization. Let’s delve a little deeper into the fund.

UBND in Focus

The ETF looks to give investors broad exposure to the global dollar denominated bond market in an effort to ward off its currency exposure. The bonds are both investment grade and junk. The fund charges 55 bps in fees.

UBND intends to cap any specific corporate issuer’s exposure at 10% of the total portfolio, any particular sovereign issuer’s focus at 25% and any specific country’s tilt toward 30% of the basket, barring U.S. exposure, per the prospectus.

US Treasury Bond 3.125% 08/15/2044 holds the top-most position with about 18.43% share followed by GSMS 2007-GG10 AM 5.794683% 8/10/2045 (8.21%) and Office Cherifien Des Pho 4.5% 10/22/2025 (4.25%). The fund has average years of maturity worth 11.45.

The fund intends to lower interest rate risk by keeping its average effective duration between negative 5 years and 10 years. It is worth noting that a negative duration means that the fund’s price will increase in a rising rate environment. Weighted average coupon of the fund stands at 5.19%.

How Does it Fit in a Portfolio?

As per WisdomTree, an unrestrained fixed income strategy increases the flexibility to generate returns and manage risk in various market environments. UBND aims to provide exposure to the attractive fixed income attributes such as higher income, diversification and lower risk, and shun the unwanted segments of bond markets that have bloated securities and unappealing risk-return tradeoffs.

As a result, the product could be an interesting choice for investors seeking exposure to the fixed income market while limiting interest rate risk and currency risks yet enjoying decent income. The strategy could be a huge hit given that the Fed is about to end a prolonged low rate environment sometime in 2015 and hike key interest rates (read: Top ETF Stories of 2014 Worth Watching in 2015).

The looming Fed stance will likely create an upheaval in the global market for a host of reasons. UBND has a global approach. With most developed nations being in the mood to support easy money policies for longer, the product can be an enticing option to cash in on low-yields but staving off negative currency translation.

In such backdrop, this new ETF offers investors a fusion. While we are not sure of how easy it would be to safeguard this bond fund from all sorts of imminent threats, still an effort from the issuer is worth a closer look at the product.

ETF Competition

The novelty in designing makes UBND a relatively distinguished play. In any case, the broad international bond market is still budding though we have seen a surge in interest over the past few years (read: Best and Worst Bond ETFs Of 2014).

The most popular funds in the emerging market bond ETF space right now includes iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSE:EMB) while well known international funds include Vanguard Total International Bond ETF (NASDAQ:BNDX), SPDR Barclays (LONDON:BARC) International Treasury Bond ETF (NYSE:BWX), S&P/Citigroup International Treasury Bond Fund (NASDAQ:IGOV) and Madrona Global Bond ETF (NYSE:FWDB). However, given the product’s unrestrained objective, it is unlikely to face any hurdle in amassing investors’ assets (read: 5 Bond ETFs Crushing the S&P 500 This Quarter).

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