In the December issue of our new publication, Bond Fund Intelligence, we interview William Belden, managing director and head of product development and management at Guggenheim Investments. We asked Belden about the launch and positioning of Guggenheim's Enhanced Short Duration ETF and its place in the changing cash management industry. Here is what he told us. (We reprint the article from our new BFI publication, which we recently launched to track the bond fund marketplace -- see our Dec. 23 News "Crane Data Launches Bond Fund Intelligence, Focus on Ultra-Shorts". Contact us if you'd like to see our latest "beta" issue.)
BFI: How long has Guggenheim been involved in ultra-short products? Belden: Guggenheim was founded in 1999 and has about $220 billion in assets under management with about $140 billion in fixed income. The short duration part of that space is a meaningful chunk of that asset base. The Guggenheim Enhanced Short Duration ETF (GSY) originally was launched as a passively managed index-based ETF in 2008 then switched over to an active strategy in 2011. I have been with Guggenheim since 2009. At the time I joined, I was with a predecessor firm called Claymore (which Guggenheim acquired). Claymore got into the ETF business in 2006 and my responsibility from the outset was product development for our ETF business.
BFI: Tell us about GSY. Belden: Our fixed-income investment philosophy relies on in-depth macro research, intensive fundamental research and legal analysis, and rigorous risk management. Our process is based on our belief that capturing attractive yields, while remaining focused on the preservation of capital, is the surest path to superior long-term investment results. GSY is composed of securities screened through a comprehensive process that continually assesses the creditworthiness of the portfolio. GSY originally began as an index-tracking ETF when it was launched in February 2008. At that time we believed it addressed a need in the ETF market for an exposure to the cash market. There really weren't many funds like it in the short end of the yield curve. Then, in 2009, Guggenheim acquired Claymore, as well as the Rydex Funds, which were both integrated into the Guggenheim ETF business.... The fund converted to an active strategy in June 2011, because we believed a more effective solution would be to have Guggenheim actively manage an ultra-short duration exposure that delivered our core competency as an asset manager -- active fixed income -- in an ETF wrapper.
BFI: How has it been received? Belden: Assets and recognition for the GSY strategy started to take off at the beginning of 2012. We're now at about $530 million in assets. We have been very pleased with the performance and the acceptance of the product, but we still feel like we're scratching the surface of what the opportunity ultimately presents us with. We present GSY as a cash alternative, and certainly something that is appealing from a yield perspective in comparison to money market funds or other cash vehicles. We talk about the fact that 90 to 100 basis points in nominal terms, given the risk/return profile of GSY in contrast to other cash investments, is pretty appealing -- and that has resonated. I think GSY fills a very nice sleeve.
BFI: What kinds of securities does it buy? Belden: In terms of securities, right now, we're limited in terms of the amount of structured credit we can buy in the fund. Also, we really feel like there [are some] attractive opportunities within the asset backed space. We don't use any derivatives in the portfolio right now to help manage duration exposure [and] we have a little bit of high yield. We like the shorter end of the curve as that type of exposure can add some yield while also having some risk control. We also have a decent amount of investment grade exposure. Also, we have some bank loans in the product, which are attractive in the sense that they are going to float with any potential rate increases that we might see. In terms of challenges, I think that certainly the supply of attractive investments and the flexibility to be able to allocate across those security types ... is a concern of the portfolio management team.
BFI: Tell us about the ETF vs. open-end fund structure. Belden: Some of the key features of the ETF structure -- efficiency, transparency, and flexibility -- provide for an optimal vehicle for delivering this type of exposure. Generally speaking, ETFs have been notably cheaper than most of the mutual fund counterparts -- and cost is obviously a big part of return. GSY, with a net expense ratio of 28 basis points, positions very effectively against open end counterparts.... Conversely, open-end funds price once a day, while GSY has intraday liquidity so you always have the ability to get into or out of the product. Another thing is the transparency. While mutual funds publish their holdings 4 times a year, ETFs are doing it every single day. We are finding more and more investors, particularly institutional investors, are very interested in knowing exactly where their exposures reside in any particular point in time. Lastly, there's often tax efficiency with ETFs in comparison to open-end funds, particularly for those that see higher degrees of turnover.
BFI: Will money fund regulatory changes impact GSY? Belden: The provisions don't actually become effective until 2016, and the interest rate scenario at that time will certainly have some influence on the pace and degree to which the movement occurs. But it's going to occur and I think it's already started in terms of people looking at alternatives and evaluating their options. We believe the impact of reforms will make the appeal of GSY even greater than it is today. It's important to keep in mind that GSY is not a money market fund, nor should it necessarily be considered a money fund replacement. However, if clients are looking to increase their opportunity to realize some level of income above the historically low levels they're receiving now on money market funds, and they're comfortable with the incremental risk that comes with investing in an ultra-short duration strategy, then GSY provides a very attractive alternative to consider for strategic cash allocations. The continued low interest rate environment combined with the changing regulatory landscape serve as a catalyst for more product development in the ultra-short duration space.
BFI: What is your outlook? Belden: Scott Minerd, Guggenheim's Global Chief Investment Officer, has said he believes the Fed won't raise interest rates anytime soon, and perhaps not until 2016.... We're big believers in GSY because of its ability to serve as a utility player in an investment portfolio. GSY can be used as a complement to money-market funds for those who might need cash-like liquidity in the next six months to two years. And the fact GSY is an actively managed ETF makes it an attractive alternative to passive ETFs in terms of risk management and an attractive alternative to money-market mutual funds in terms of portfolio transparency and ease of use."
