ETFs for Investing: The Growth and Income Strategy

We have Uber for example.

So Uber was actually added a TRFM's tracking index 12 months before the S&P 500 added it.

Stock price appreciated close to 100% during that time period.

It's not going to work out all.

It's not going to happen all the time, but we think that that's a good example of what TRFM could potentially bring to the table. >> Welcome to all.

I'm Britney Mason with ETF Guide.

With us today, we have Chandler Nichols from Advisors Asset Management.

We're glad to have you watching and join our community by hitting the subscribe button along with posting your comments.

We're glad to have you with us today, Chandler. >> Great to be back. >> Let's start with the AAM Transformers ETF ticker TRFM.

The fund has really picked up bullish momentum and is outperforming the NASDAQ 100 since the start of the year.

What's behind TRFM's bullish move and what are some of its holdings? >> Thanks for uh having me back, Bernie.

It's um TRFM hasn't been short of accolades, not only just year to date, but over the life cycle of uh of the product's inception.

So TRFM has been around for close to three years now, and it's not only outperforming the NASDAQ 100 year to date, it's actually been outperforming the S&P 500 since its inception.

Um and it's actually in the top quartile amongst its immediate peer group over the past three years.

So we're we're really happy with uh with TRFM's performance.

And you know just to take a step back as to what TRFM is.

This is a rules-based global thematic ETF and it tracks uh the Pence transformers index an index that selects its underlying constituents based on research and development expenditures and sales growth in order to really get exposure to really fast growing companies and those companies that could even potentially be you know acquired down the line by such larger companies.

So um in terms of its overall performance and what's been driving that um one key thing to keep in mind with TRFM is its ability to call it manage risk in a riskier area of the market.

You know thematic uh thematic strategies overall tend to be you know they tend to lean towards mid to small cap growth uh areas of the style box.

Uh but TRFM is a multi-the solution.

So we're not taking one single theme bet.

Uh it has a constituent count of roughly 200 stocks which are modified equal weighted.

So, um, no stock tends to hold, um, you know, above 2% as far as the overall portfolio upon its quarterly rebalance.

And what we really like about, and this is getting into the exposure now, we really like about TRFM is how that all pans out as far as its final portfolio because um, less than 10% of the portfolio are in the magn magnificent 7 cohort of stocks.

So think like your Teslas, Microsofts of the world, they're in the portfolio, but as far as their waiting in the overall portfolio, they tend to be lesser of that uh uh that overall portfolio mix.

Uh so TRFM's value ad recently has actually been found in its international bucket in recent months.

So key themes like global defense, uh China, China internet have been uh some top contributing um areas of the market that have been key to TRFM's recent performance.

But TRFM and what we like about their strategy is that it's uh ability to potentially add um you know lesser known names before they end up before they end up getting added to the overall larger benchmark.

So um I wouldn't call this a lesserk known name but definitely a good example.

We have Uber for example.

So Uber was actually added to TRFM's tracking index 12 months before the S&P 500 added it.

Stock price appreciated close to 100% during that time period.

It's not going to work out all.

It's not going to happen all the time, but we think that that's a good example of what TRFM could potentially bring to the table as far as portfolio application goes. >> Well, congratulations on the recent launch of AAM, Todd International Intrinsic Value ETF, ticker TIV.

The fund is focused on finding international stocks that have been overlooked or undervalued. tell us more about TIIV's strategy and how the ETF might be deployed by advisers and investors. >> Thank you.

And this is a launch that we've been really excited for because we're really grateful for the team at Todd Asset Management.

So they are the subadvisor for this strategy and in fact the strategy that underpins this ETF has been in existence for close to two decades now with a very successful track record.

So, we're really excited about what Todd brings to the table in the international equity space uh because of their process, their intrinsic value investing process using their proprietary multifactor ranking model.

And it's essentially, you know, what this multifactor ranking model is.

It's essentially a bottoms up process where Todd targets undervalued stocks with attractive fundamental strength because um you know, in order to um find those types of stocks for portfolio, we they they feel that a quantitative like approach through that bottoms up process helps them find uh well-valued stocks um that are high quality not just in developed markets but also emerging markets as well.

A lot of international strategies tend to only concentrate on developed markets, but TIIV concentrates on the full PI.

So from a portfolio application standpoint, we feel it's very easy for TIV to slip right into a core um core equity portfolio because most of naturally most US investors already have that US bucket chosen.

So TIV could be a great complement to um to those types of strategies in order to um get that full global diversification as far as the equity sleep goes.

Moving along, the AAM lowduration preferred and income securities ETF ticker PFLD invests in preferred securities with low duration in a volatile interest rate landscape.

How does this ETF manage duration risk while still delivering attractive yields? >> Yeah, so uh going to take a step back and just go through what PFLD is and this is another rules-based strategy here on the AM ETF platform. uh honing in on the preferred the US preferred uh securities landscape and uh essentially our selection universe for this portfolio is the entire US preferred securities market.

Exchange listed preferred and over-the-counter preferred those $1,000 pars are included in that selection universe.

So as far as the duration uh risk goes from that selection universe um PLD's tracking index will incorporate two filters.

One is that duration risk screen which kind of goes back to your original question regarding that PFLD's tracking index is going to remove any preferred stocks that are uh have a duration above that of 5 years.

Uh but for the other side of the fence and even a interest rate environment where rates are are lowering uh PLD actually has another screen with within its portfolio where uh PLD will screen out any preferreds that are trading 5% above their face value.

So in a uh lowering interest rate environment where preferreds which tend to have um call options attached to them that call risk tends to ramp up during times of lowering interest rates and increases reinvestment risk in that regard.

So uh as far as interest rate risk goes from both sides of the fence not just rising rates but lowering rates PFD is pretty multi-purpose in that regard.

Um, so as far as its exposure goes, I mentioned, you know, we're filtering from that initial universe of just, you know, retail and OTC preferred.

Most of its exposure right now is within that pretty desire, what's known as a pretty desirable area of the preferred market, that OTC $1,000 par market, close to 75% of its portfolio can be found in that particular space.

So those types of securities tend to be variable rate in terms of their coupon structure.

And that again is just another kind of side component of what makes PFLD PLD from a duration risk um from a duration management risk standpoint. >> The AAM SLC lowduration income ETF ticker Loi aims to deliver income through lowduration fixed income securities.

How does the fund balance yield generation with interest rate risk and what types of bonds or instruments are most prominent in its current allocation? >> Yeah.

And uh so we're now moving over to the actively managed ETF segment of the AAM ETF platform.

Uh so Loi is uh it's subadvised by SLC fixed income.

These are um institutional money managers who um manage a significant amount of money in the in that specific uh channel as far as fixed income markets go.

And from an interest rate risk standpoint, Loi, it's actually very simple.

So there's two major ways, you know, you're going to be able to essentially find value as far as an actively managed fixed income portfolio goes. duration management and then the the credit selection as far as the sector exposure of the overall portfolio.

Interest rate risk is handled very simply.

So LOI actually seeks to just match the duration of that of its benchmark which is the Bloomberg one to threeyear government credit index.

Um so as far as a duration management goes, it's um it's very expected to be anywhere from one and a half to two years over the long term.

So you know towards the short end of the curve as far as that goes.

But where a lot of its exposure is uh is found as far as the credit bucket goes is in investment grade but specifically in that single A to tripleB bucket primarily uh split between corporate credit and securitized debt as well.

So think uh asset back securities, commercial mortgage back securities uh and collateralized loan obligations.

So CLOS's.

Um so as far as uh the the selection process goes this is a bottoms up fundamental uh strategy where the team's looking for positive spread opportunities particularly within the securitized markets uh as well as corporate credit as well.

So for example like if I had to look at uh if we looked at like the asset back security exposure of load ice portfolio most of it is expected to be in that triple B bucket as I mentioned earlier but over the life cycle of holding these different types of securitized bonds in the ABS sector um you have the potential to benefit as those bonds near maturity from credit migration.

So maybe they bought it when it was a triple B rated bond, but maybe when they sold it or the bond matured, this hypothetically speaking could potentially be single A or or double A as far as uh the overall credit rating goes.

So theoretically, that's how they're looking to add value in the portfolio and capital appreciation potential and current income potential as well because securitized debt tends to offer uh pretty attractive yield relative to their corporate credit counterparts.

So uh as far as like the you know overall allocation preference you know there's two different investors investor types for a strategy like load eye one is potentially that cash plus investor naturally there are risks as far as duration and credit risk goes but for those looking to step out uh a little bit further onto the curve and um and take on a little bit more credit risk there could be an attractive yield case there relative to that of a uh of a typical money market or money market like strategy and then the other way is naturally in the core part of a portfolio.

So we like to think of load eye as really this core plus strategy on the short end of the curve.

Uh where there's a really nice diversification potential with this strategy as well.

So for instance the Bloomberg aggregate bond index which is typically viewed as like the S&P of fixed income land that doesn't have CLLO exposure.

It barely has ABS exposure and CNBS exposure.

So LOIC could potentially be a nice diversification um value ad there as far as the fixed income allocation goes. >> Thank you Chandler Nichols.

I'm Britney Mason with ETF Guide.

Thanks for watching.

We'll see you next time.