Virtus Investment Partners has put a sizable emphasis on alternative fixed income in its small but growing suite of exchange-traded funds, and it follows that bent with today’s launch of the Virtus Newfleet ABS/MBS ETF (VABS).
The actively managed fund invests mainly in short-duration, investment-grade securitized debt across asset-backed securities (ABS) and mortgage-backed securities (MBS). It aims to generate a competitive yield and provide diversification versus traditional core fixed-income securities.
ABS and MBS are pools of loans that pay interest until maturity. According to the prospectus, the fund's ABS portion can include various securities including those backed by auto loans, timeshare receivables, consumer loans, equipment leases, rentals, whole business securitizations, credit card receivables and student loans. In addition, the fund will invest more than 25% of its total assets in commercial and residential MBS, including all types of agency and non-agency MBS. Agency MBS are issued or guaranteed by the Government National Mortgage Association (Ginnie Mae), Federal National Mortgage (Fannie Mae) or Federal Home Loan Mortgage Corp. (Freddie Mac).
The Virtus Newfleet ABS/MBS ETF is the 14th product in Virtus’s ETF lineup, which had more than $627 million in aggregate assets under management as of Feb. 3, according to ETF.com.
Virtus partners with boutique investment managers employing a variety of strategies and styles to create products it believes provide access to distinctive investment niches. Beyond ETFs, its product line runs the gamut from mutual funds and closed-end funds to variable insurance funds and UCITS, among others. Virtus Investment Partners had total assets of more than $132 billion through year-end 2020.
The VABS fund is the third ETF collaboration between Virtus and Newfleet Asset Management, a $10 billion fixed-income specialist and wholly-owned subsidiary of Virtus Investment Partners. Their other products are the Virtus Newfleet Multi-Sector Bond ETF (NFLT), which uses a sector rotation strategy involving various fixed-income categories, and the Virtus Newfleet Dynamic Credit ETF (BLHY) that allocates between two non-investment-grade credit sectors: high-yield corporate bonds and floating-rate bank loans. Both products are actively managed.
As for the new ABS/MBS-focused ETF, it faces stiff competition from the likes of iShares and Vanguard. The iShares MBS Bond ETF (MBB) holds assets of more than $26 billion and charges a fee of 0.06%, while the Vanguard Mortgage-Backed Securities ETF (VMBS) has nearly $14 billion in assets and sports an expense ratio of 0.05%. Both are index-tracking products.
The VABS ETF charges a net expense ratio of 0.39%, but Newfleet president and chief investment officer David Albrycht says its value-add is the active management provided by the fund’s team of four veteran portfolio managers—including himself.
“This fund is consistent with our multi-sector approach, but it’s confined to structured products,” he said. He added it’s difficult for people to get access to certain non-mainstream offerings in the ABS space, but his team’s long tenure and industry contacts give them access when Wall Street rolls out various structured offerings.
The fund’s prospectus notes the management team's due diligence includes examining the underlying asset of a potential investment, assessing the loan originator and management team of the issuer, and analyzing the deal structure and cash flow priorities.