Get Fed Prep With This ETF

Exchange-trade funds holding U.S government bonds have been among this year's hottest performers, but the Federal Reserve is not making things easy on fixed income investors. Putting it mildly, the Fed is unpredictable, so sometimes it pays to get some help in the bond market.

The SPDR DoubleLine Total Return Tactical ETF TOTL is one way to get that help. TOTL is just 13 months old and is already home to more than $2.2 billion in assets under management, making it one of the most successful ETFs to come to market in 2015. TOTL has star power on its side, as it is managed by DoubleLine Capital, Jeff Gundlach's firm. That is an advantage for bond investors in the face of an unpredictable Fed.

TOTL is actively managed, which gives investors another advantage at times of Fed unpredictability because Gundlach's team does not need to be married to Treasurys and U.S. government agency debt.

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“The rising complexity of individual bond asset classes has made it difficult for investors to navigate the fixed income market, and a diversified fixed income portfolio isn’t easy to build. TOTL can help steer the ship through volatility while mixing interest rate- and credit-sensitive sectors for true diversification whether rates are rising or falling,” said State Street Vice President David Mazza in a new note.

Holdings And Allocations

TOTL currently allocates over 56 percent of its weight to mortgage-backed securities more than five times its second-largest weight. That number two spot is a 10.2 percent weight to emerging markets debt, which has been thriving this year, topping the returns offered by comparable developed world bonds.

TOTL's MBS weight is down slightly from the start of this year. The ETF also holds Treasurys, investment-grade corporate bonds, bank loans and a small smattering of junk corporates, among other bond asset classes.

Overall, TOTL holds 621 bonds, while sporting a modified adjusted duration of 3.78 years. A 30-day SEC yield of over three percent for an ETF with a duration of less than four years is a pretty good proposition among traditional bond ETFs, particularly when considering most of TOTL's holdings are investment-grade.

“TOTL mixes traditional, lower-risk, interest-rate-sensitive sectors like US Treasuries and agency mortgage-backed securities with non-traditional, higher-risk, more credit-sensitive sectors, such as non-agency mortgage-backed securities, high-yield and emerging market corporate debt. The intent is to create a portfolio with offsetting risks and better risk-adjusted returns,” added Mazza.