When I wrote about a new entrant to the ETF industry -- the parent company of mutual fund manager American Funds, Capital Group -- the behemoth launched a small suite of equity-focused actively managed funds, including a core-plus income product. As I expected, Capital Group had no problem finding investors to buy shares of their funds, as seen in the table below. Despite all but one fund underperforming the S&P 500 fund (SPY) , they were still able to gather just over $2.5 billion across the four funds.
Now, Capital Group has taken aim at building out the fixed-income side of its product suite with the launch last week of three new bond funds: The Capital Group Municipal Income ETF (CGMU) ; Capital Group U.S. Multi-Sector Income ETF (CGMS) ; and Capital Group Short Duration Income ETF (CGSD) . Let's take a look.
The Funds: CGMU, CGMS and CGSD
The Capital Group Municipal Income ETF is an actively managed municipal bond fund with a 27-basis point expense ratio, meaning a shareholder with $1,000 invested over a calendar year would pay $2.70 in fees over that period.
The fund's description outlines a barbell approach to managing credit quality, meaning investors should look for a mix of higher rated (lower yielding) and lower quality (higher yielding) bonds. There seems to be a fair bit of flexibility when it comes to managing portfolio duration (interest-rate sensitivity) in that the stated benchmark is a one- to 17-year bond index and managers will look to be with one year over/under the benchmark duration. Something to be mindful of is that the fund states it "will invest up to 30% of assets in securities that may subject you to federal alternative minimum tax."
The fund just launched, so there's no real return history to talk about. Still, reviewing the fund's 53 municipal bond holdings reveals that currently 22 states are represented, with New York (28.50%), Illinois (11.06%), and New Jersey (8.31%) accounting for close to half of the fund. Using a weighted average approach, I approximate the portfolio average maturity at January 2039, so I figure a duration figure on this fund to be similar at around 16 years. I'm not sure which bonds are callable or have other redeem features, so the actual number could be shorter, but given the pace of rate hikes these days, anything north of a 10 year duration seems a little long, considering what the Fed has outlined as its plan. Still, don't forget that municipal bonds are federally tax-exempt, and, if issued by your state, locally exempt in your home state as well. Also, Puerto Rico bonds are tax-exempt everywhere and CGMU has a 3.7% allocation there, too.
Next is the Capital Group U.S. Multi-Sector Income ETF, an actively managed corporate bond fund with a 39-basis point expense ratio. This fund bills itself as focusing on income generation with an eye to capital appreciation. It is positioned as a "relative value credit fund" that will look for opportunities to invest in investment grade, high yield, and what the issuers calls "securitized sectors." In reviewing the holdings, it looks like securitized sectors refer to holdings like the 2 Credit Default Swaps (CDS) listed among the fund's 296 holdings, which also include long and short Treasury futures. There are also a number of 144A securities, which are private placements, kind of like direct loans to a company, but in a securitized form. Approximately 36% of the portfolio is made up of these types of securities. An additional 36% seem to be in traditional corporate bonds, and I'm guessing that the roughly 27% cash position is acting as collateral for the CDS and futures positions. A back of the napkin duration measure for this fund comes to a little over 4.5 years so there doesn't seem to be as much interest rate risk here as in CGMU.
Looking through the issuers, the fund does seem to live up to its multi-sector label as names like NCR Corp (NCR) , Netflix (NFLX) , Bombardier (BDRAF) , Valvoline (VVV) , Sealed Air (SEE) , and Hanesbrands (HBI) among others play into the diversification aspects of the portfolio.
Finally, the Capital Group Short Duration Income ETF has a 25-basis point expense ratio. From what I can tell, the fund looks to straddle the space between a cash-like investment like a money market fund, and something like CGMS. It does this by controlling exposure to both duration (interest rate risk) and credit quality by focusing on higher quality, shorter-dated corporate bonds as well as government-issued debt including asset- and mortgage-backed securities. The fund also can have exposure to inflation-linked bonds as well as swaps and futures.
My Take
In writing these articles, I pay attention to what's going on in the ETF marketplace and try to call out interesting new products and trends. While these funds don't fundamentally break any new ground, it is interesting to me to see what steps one of the largest mutual fund issuers is taking to establish their place in the ETF marketplace. As I've said before, I'm keeping an eye on Capital Group because you don't get to be their size by disappointing investors.
