IG - IG: No Signs Of Active Alpha
2023-05-26 07:21:41 ET
Summary
- The IG ETF is an actively managed ETF that is marketed as capitalizing on market inefficiencies to deliver superior 'risk-adjusted returns'.
- However, after reviewing the fund's performance, I do not see any evidence of active 'alpha'.
- While I believe active bond managers can help investors outperform by picking attractive investments in the coming recession, I am not sure IG will be that vehicle.
With a heightened risk of recession, I have been advising readers to reduce risk and upgrade the quality of their portfolios. For example, I have suggested investors move into mega-caps via the Invesco S&P 500 Top 50 ETF ( XLG ), which has returned 5.3% since my article , outperforming the flattish performance of the S&P 500 Total Return Index (Figure 1).
Figure 1 - XLG has outperformed S&P 500 since my recommendation (Seeking Alpha)
Another way investors can try benefit from the coming storm is to seek out active bond managers that can take advantage of the coming recession to pick investments that will outperform over the coming years. I recently highlighted the Pimco Active Bond ETF ( BOND ) as potentially one such fund, capitalizing on Pimco's fixed income expertise.
In this article, I will review another active bond fund, the Principal Investment Grade Active ETF ( IG ), to see if it is also worthy of a recommendation.
Fund Overview
The Principal Investment Grade Active ETF is an actively managed bond ETF that focuses on investment grade bonds.
The IG ETF is a relatively small fund with only $43 million in assets, although it only charges a 0.19% expense ratio, low for an actively managed fund.
Strategy
Although the Principal Investment Grade Active ETF is small by itself, the fund is sponsored by Principal Asset Management, a large global asset management company managing close to $500 billion in assets.
The portfolio managers for the IG ETF believes the investment grade corporate bond market is inherently inefficient and that they can generate 'alpha' and 'risk mitigation' through an actively managed portfolio.
Figure 1 shows a portfolio construction framework for the IG ETF that is full of industry jargon like dividing the investable universe into 'risk group's and weighing the 'risk groups' based on the manager's 'macro-outlook' to exploit inefficiencies and maximize 'risk-adjusted' returns. Securities are selected with 'attractive value and quality' characteristics.
Figure 1 - IG ETF portfolio construction framework (IG factsheet)
Overall, the fund's factsheet , website , and prospectus offer very little details on how the IG ETF's portfolio is constructed and managed on a day-to-day basis.
Portfolio Holdings
The IG ETF currently holds 114 positions with a weighted average duration of 7.3 years and a portfolio yield to maturity of 5.2% (Figure 2).
The IG ETF's sector and credit allocations as of March 31, 2023 are shown in Figure 3. Relative to the Bloomberg U.S. Corporate Investment Grade Bond Index ("Index"), the IG ETF has a larger allocation to the transportation sector and an underweight in technology, communications, energy and consumer cyclical sectors. The fund also has a relatively high cash weight of 6.6%.
Figure 3 - IG ETF sector and credit quality allocation (IG factsheet)
In terms of credit quality, the IG ETF is overweight lower quality BBB-rated credits and underweight higher quality A-rated credits, relative to the Index. However, almost all of the fund's investments are investment grade, as per the strategy mandate.
Distribution & Yield
The IG ETF pays a generous monthly distribution with trailing 12 month distribution of $1.49 / share or a 7.3% yield (Figure 4).
Figure 4 - IG pays a generous trailing distribution yield (Seeking Alpha)
However, investors should note that the IG ETF's distribution can be quite 'lumpy', with several large distributions at the end of 2022 leading to the high trailing yield (Figure 5)
On a forward basis, the fund's 30D SEC yield of 4.8% and annualized distribution yield of 4.2% may be more representative (Figure 6).
Figure 6 - 30D SEC yield may be more representative of IG's distribution yield (IG factsheet)
Returns
Figure 7 shows the IG ETF's historical returns. Overall, the IG ETF has delivered very modest returns, with 1/3/5 Yr average annual return of -0.8%/-1.9%/1.7% to April 30, 2023.
Notably, the IG ETF has ranked in the 3rd or 4th quartile against peers in the Morningstar category Corporate Bond . Relative to peers, the IG ETF also has above average risk (as measured by returns volatility) and average returns (Figure 8).
Conclusion
While I believe active bond management has the opportunity to deliver above average returns in the coming years by buying 'attractive assets' during the pending recession, I am not sure if the Principal Investment Grade Active ETF is the right vehicle to take advantage.
Without details on the manager's allocation philosophy and risk management practices, we can only assess the IG ETF based on its historical returns. Based on its 5 years of operating history, the IG ETF has delivered modest performance that has underperformed peers despite being marketed as 'actively managed' to take advantage of 'inefficient markets'. Overall, I see nothing that suggest the manager is able to add any 'alpha' in managing investment grade corporate bonds.
I suggest investors skip this small ETF and seek credit exposure elsewhere. I will continue to review active bond funds and highlight those that I believe can help investors outperform.
For further details see:
IG: No Signs Of Active Alpha