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Corporate Bond ETFs

Dec 24, 2012

Guggenheim ETFs

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Q:  What is the history of Guggenheim Investments? A : Guggenheim Investments was formed through the bringing together of eleven asset management businesses and currently manages $160 billion in assets. The firm brings deep resources and expertise in the fixed income markets. We manage assets across a diverse set of asset classes ranging from fixed income, equity and alternative investments, packed in mutual funds, closed-end funds, Unit Investment Trusts (UITs), Separately Managed Accounts (SMAs) and exchange-traded funds. Guggenheim’s ETF business is roughly a $12 billion business across 78 strategies. Q:  What different strategies do you provide? A : For our ETF business, our strategies span across global equities and fixed income. Our strategies are aligned along suites, including; Fixed Income, Equal Weight, Equity Income, Pure Style, Developing Markets and CurrencyShares. Our fastest growth has come from our fixed income suite. BulletShares have fueled much of our growth. BulletShares are defined-maturity ETFs available in corporate and high yield bond space. They have been embraced by advisors seeking to manage their life-events, or to ladder their bond exposures. BulletShares provide the precision of individual bonds, and the diversification benefits of bond funds. Probably the biggest challenge facing investors is how to source income in this low yielding environment. In addition to our BulletShares options, we also provide unique exposure through our Guggenheim Multi-Asset Income ETF (CVY). We believe that it represent a very compelling equity income option. CVY provides exposure to dividend paying stocks, as well as allocating to closed-end funds (CEFs), master limited partnerships (MLPs), ADRs, REITs and preferred securities. This strategy provides attractive yields, and offers the additional advantage of diversification across low correlating asset classes. Equal weight is Guggenheim’s largest ETF suite. We introduced an equal weight version of the S&P 500 (RSP) in 2003, and then launched nine equal weight Sector ETFs to allow advisors to overweight or underweight sector exposures. Our equal weight S&P 500 ETF has provided superior risk-adjusted results relative the traditional cap-weighted indexes. Rather than arbitrarily overweighting the largest stocks, equal weight provides a more rational allocation, where each company has an equal opportunity to contribute returns. Equal weight strategies reduce the concentration risk typically associated with cap-weighted strategies. We currently offer 16 equal weight strategies, spanning the globe (international and emerging markets), and capitalization (small, mid and large cap). Q:  What are BulletShares designed for? A : BulletShares are defined-maturity ETFs that provide the individual characteristics of a single bond and the diversification benefits of a bond fund. They provide steady and predictable income payments, and like a bond they mature over time. Although they are designed to act like individual bonds, each BulletShares will hold between 30 and 200 bonds. BulletShares are available in individual years ranging from Corporate BulletShares from 2012 to 2020. High Yield BulletShares are available from 2012 to 2018. Advisors use these strategies in building laddered portfolios, and have the flexibility to roll positions forward to a different point in time. Advisors can use BulletShares as valuable planning tools to meet their clients’ life-style needs. BulletShares provide predictable income, and NAV upon maturity, which can be helpful in meeting a clients cash flow needs and/or planning for significant events (i.e., Retirement, College Funds, Purchase, Taxes, etc.). Q:  What are the advantages of BulletShares? A : Financial advisors embrace financial planning as a means of meeting their client’s life-style or life goals. Advisors spend significant time and energy interviewing clients, analyzing needs and developing solutions to meet their clients’ goals and objectives. The goals can be to satisfy a particular standard of living, or to manage future cash flow requirements (i.e., taxes, retirement, college funding, etc.). Unfortunately, not all investment solutions align with the desired goals and objectives. Many advisors seek fixed income solutions to provide safety and stability. Fixed income investments generally provide a predictable income stream and the principal amount at maturity. Historically, advisors could select between buying individual bonds or bond funds to gain exposure. Each has their pros and cons. Individual bonds provide the predictable income stream and principal at maturity. However, it may be time consuming for advisors to conduct analysis on the individual bonds, and they may not be available in smaller increments. Trading smaller notional amounts may also come at a steep cost. Bond funds provide professional management and diversification advantages. The fund manager would be able to conduct credit analysis to determine which bonds were appropriate for the fund, and construct a diversified portfolio to meet the goals of all investors. However, bond funds have a ‘perpetual’ duration. For instance, if an investor purchased a bond today that was maturing in 3 years, they would typically receive monthly income payment and their principal back at maturity (3 years). If the investor bought a bond fund, with a 3-year maturity, in 3 years the fund would likely still have a 3-year maturity. The fund manager would likely need to adjust the duration of the portfolio to adhere to the prospectus guidelines. The nature of the defined-maturity structure allows advisors to determine the duration risk they are willing to assume. BulletShares provide the precision of individual bonds, and the diversification benefits of bond funds. We often hear from advisors how difficult it is to purchase individual bonds. Many of the firm’s carry less inventory, and there is often a significant spread in buying individual bonds. We firmly believe that BulletShares represent a viable alternative to buying individual bonds. Most advisors lack the ability to do the proper credit analysis to determine which individual high yield securities are appropriate for their clients. Since individual bonds tend to be riskier than a group of bonds, it is better to own a diversified basket of bonds than just selecting an individual bond. High yield bonds are also subject to default risk; therefore, determining the right bond and avoiding the wrong bond are at a premium. Q:  Who is responsible for the bond selection process? A : The index provider is Accretive Asset Management LLC. They create an underlying index of eligible securities. The index will contain bonds that mature in a given year, or have call features that likely cause the bond to be called within the given year. Accretive creates the underlying index, and then our portfolio management team focuses on sourcing bonds and portfolio construction amongst the list of eligibility securities, leveraging our experience in the fixed income markets. Because of the nature of fixed income ETFs, we are not necessarily owning every underlying constituent. We use a ‘sampling’ process design to replicate the characteristics of the index. As the individual BulletShare grows over time, we are adding to the number of holdings. Q:  Would you describe your equal weight strategy? A : Equal weight strategies are often referred to as ‘alternative weighting’ or ‘better beta’ strategies. Guggenheim has a long history in introducing equal weight strategies to the marketplace. Our history with equal weight goes back to 2003. Our equal weight S&P index strategy was launched in 2003, shortly thereafter we offered sector strategies taking the S&P indexes and breaking it into nine sectors and equal weighting them. In 2010, we expanded our family by offering MSCI strategies that span the globe (EAFE and Emerging Markets) and Russell strategies up and down the cap spectrum (small, mid and large cap). Equal weight is our largest suite and our equal weight S&P 500 ETF (RSP) is our largest strategy. Rather than overweighting the largest companies in an index, which cap-weighted indexes do, equal weighting provides a more logical allocation across the index. Each company has an equal weight, and consequently, and equal opportunity to contribute to the return of the index. For example, the cap-weighted S&P 500 has 20% of the index in the top 10 companies and 50% of the portfolio in the top 50 companies. In other words, the cap-weighted S&P 500 is a mega-cap portfolio, dependent upon the performance of the biggest companies. Based on our research, equal weight indexes offer the following characteristics: - Performance Potential - may provide favorable risk-adjusted results, as demon-strated by the S&P Equal Weight Indices, which have historically outperformed their market cap weighted equivalents in the long-run. The level of performance has also varied considerably under different market conditions. - Diversification - may help reduce the concentration risk through broad diversification across market segments. - Disciplined Rebalancing - systematic reallocation from outperforming to under-performing stocks and market segments may provide enhanced risk control and opportunity to capture long-term equity market performance. - Persistence - we have seen similar experiences with other Equal Weight indexes. Our equal weight strategies have historically provided better risk-adjusted results, through the reduction in the concentration risk, and a value through the discipline rebalancing process. Q:  What is your new product or ETF strategy development process? A : Our product development strategy is focused on a number of factors. We try to determine demand from the marketplace. We focus on our core competencies, and whether there are comparable products in the market. Lastly, we are trying to anticipate future demand. Our emphasis on fixed income ETFs comes from our long and rich history in the fixed income market. In addition to our BulletShares, we also provide short duration exposure via the Guggenheim Enhanced Short Duration Bond ETF (GSY). GSY is our ultra-short duration actively managed strategy that leverages our core competencies. We will look to expand our line-up over time. However, we will not add strategies merely to have a bigger footprint. We want to provide unique and innovative strategies that assist advisors in meeting their client’s needs and objectives. Q:  How do you educate advisors? A : It is not a one size fits all. We write white papers, and strategy pieces to help advisors in understanding the nuances of strategies. Also, we do research and write reports on how strategies perform in various market conditions. We assist advisors with tactical investment ideas that help in responding to the changing market dynamics. We create and publish content on our Web site, as well as share with our partner firms as well as create presentations and speak at industry conferences to help educate consumers in the differences in various strategies. We have formed the {{ETF Knowledge Center}} to address the educational needs of advisors and the client’s they serve. The Knowledge Center provides education internally as well as externally. We receive inquiries about BulletShares, and how advisors can incorporate in client portfolios. As well as how equal weight compares to cap-weighted or fundamentally weighted strategies. Other inquiries we receive are often on how strategies perform in various market regimes. We partner with firms like Charles Schwab, Morgan Stanley Wealth Management, Merrill Lynch and UBS to provide education. We provide content and speak at educational forums. We also conduct webinars and provide insights on the industry through various media outlets. The Knowledge Center provides analysis, answers detailed questions about suites and the overall ETF marketplace. We understand that an educated consumer will have a better experience – which is good for advisors and clients. .
Annual Return 2018 2017 2016 2015 2014 2013 2012 2011 2010
GSY - 49.08 48.08 47.21 46.72 46.36 45.71 45.03 44.99