The new fund comes just weeks after Angel Oak's first product. While Angel Oak is a new entrant to ETF-Land, they have history managing money and, important to the management of CARY, bill themselves as "one of the largest securitizers of non-qualified mortgages in the nation." This makes sense because CARY is billed as an income fund with a "strong bias toward residential mortgage credit."
This particular fund has a 79-basis point expense ratio after a 20-basis point fee waiver (until May 31, 2024), meaning shareholders with $1,000 invested over a calendar year would pay $7.90 in fees over that period.
A non-qualified mortgage is one that falls outside the definition of a mortgage that quasi-governmental organizations like Ginnie Mae, Fannie Mae, Freddie Mac, and Farmer Mac. These groups not only facilitate loan origination in U.S. mortgage markets, but also help other lenders free up capital by purchasing so-called conforming mortgages and securitizing them into mortgage-backed securities (MBS). These loans must be qualified as defined by the Bureau of Consumer Financial Protection. High level qualifications include loans that have a term no longer than 30 years, do not employ balloon payments, are interest-only or permit negative amortization, have reasonable fees and interest rates, and whose borrowers have been screened on debt-to-income ratio and estimates of residual income.
Conforming loans must adhere to borrowed amount limitations as defined by the Federal Housing Finance Agency, which sets those limits based on local housing markets.
Based on these qualifications, it seems like Angel Oak has experience with either what would be described as low-quality (high yielding) loans and high dollar amount (jumbo) loans, which assumedly would be taken out by high earners and be viewed as more sound.
Now that we have a little background on what the fund is investing in, let's take a look at how Angel Oak intends to go about managing the fund.
Looking at the fund factsheet the issuer intends to have approximately 60% of the fund in Non-Agency Residential Mortgage Backed Securities (RMBS), 10% in Asset-Backed Securities (ABS), 2.5% in Collateralized Mortgage Backed Securities (CMBS), 7.5% corporate bonds, and the balance in Treasuries and cash. Given that the fund is relatively new, the holdings file I pulled down from their website indicates about 92% in Treasuries and cash and the balance in two corporate bonds from Australian private equity firm Anchorage Capital and Artificial Intelligence Developer Pagaya Technologies, and one ABS bond issued by Spirit Airlines (SAVE) . Reading through the prospectus, the issuer outlines that along with various asset-backed, corporate and government bonds, the fund can also invest up to 15% of its assets in illiquid investments, including 144A securities, private placements, and securities of bankrupt issuers or issuers who are currently in default. The fund is also open to using derivatives such as swaps, futures, and options.
The fund is benchmarked against the Bloomberg U.S. Aggregate Bond Index but is actively managed. Given Angel Oak's other pooled products like mutual funds, a closed-end fund an interval fund, and from reading through the firm's Form ADV Part 2 (page 7), a $10 million minimum on separately managed accounts for a total of $17.3 billion as of last year's end, it seems that they have at least some skill managing assets in this strategy.
Wrap It Up
Both the Index and ETF industry have been talking about the lack of penetration of fixed-income funds in ETF land especially given the massive amount of issued and outstanding bonds not to mention the lopsided asset mix within ETFs. We have seen a surge in what I'll call the "retailization" of institutional derivative strategies in the past few years in the ETF marketplace. It seems to me that issuers like Angel Oak are starting to push the envelope in the fixed income space and to that, I'll once again quote Guns & Roses to say, "Welcome to the jungle!"
As for the fund itself, it adds a fixed-income twist to funds like Armada's equity-based Residential REIT Income ETF (HAUS) , which I wrote about earlier this year. Given where rates are and where they are going, CARY looks interesting, but I'd keep an eye on the overall macroeconomic picture in case the Fed's landing ends up being harder than expected.