Legg Mason subsidiary Western Asset is listing a new investment grade bond ETF that offers shorter duration exposure. The Western Asset Short Duration Income ETF (WINC) will invest 80% of its assets in US-dollar denominated investment grade bonds — of more or less any kind. These include corporate bonds, notes, debentures, commercial paper, rule 144As and more. The fund leaves 15% of its assets open to MBS, ABS CDOs.
WINC can invest in both US and non-US issues, although will concentrate on US issues. It will target an overall portfolio duration of 3 years or less.
It will charge 0.29%.
Analysis – a short duration fad
ETF product innovation goes in cycles and fads. In 2017 the fad was future tech. In 2018 the fad was ESG. This year it seems possible that short duration could be a fad, as this is the third listing in several weeks.
Short duration has – or maybe had – a great background story. With interest rates rising, the decade-long long duration trade was about to stop working. Investors accordingly need to pivot to shorter duration bonds, which are less exposed when rates rise.
But future interest rates are tricky to predict. Whereas 3 months ago it was “obvious” the Fed would continue raising rates, now it seems likely that the Fed will pause or even lower them.
With this in mind, it might be better to regard short duration ETFs as market timing devices. And market timing, when botched, has potential costs. Crucially for a bond ETF, the potential cost is foregoing the term premium. Research shows that longer duration bonds tend to outperform, as they take on more risk. We can see this when we compare the total returns of short duration ETFs, (like iShares NEAR) with longer-term bond ETFs (like Vanguard’s BLV).