If there’s one segment of the market that investors seem on edge about, it has to be real estate. Both the housing and commercial sectors of the market have suffered as rising rates have zapped demand, while macroeconomic trends have continued to pressure rents and occupancy rates. All in all, many analysts have postulated that real estate will be dead money for quite some time.
This makes it an odd time to launch a pair of ETFs covering the sector.
But DoubleLine’s two new ETFs may just have an edge in the real estate market. As active ETFs, the two new funds could be seen as value plays and buy bargain mortgage-backed securities (MBS). And in that, they could be big winners over the long haul. For investors, the time could be right for the ETFs.
DoubleLine’s ETF Suite
For the uninitiated, DoubleLine Capital was founded by Jeffrey Gundlach after leaving TCW. Gundlach has risen to prominence after guiding DoubleLine’s Total Return mutual fund to mega-sized gains. Since then, Gundlach has been anointed by financial media as the ‘Bond King’, taking the crown from PIMCO’s now-retired Bill Gross. Gundlach has also become a staple of financial media on TV and in print.
As such, DoubleLine’s assets have grown considerably across several investment vehicles. This includes several ETFs. At first, these were management positions for other sponsors such as DoubleLine’s deal with State Street for the SPDR DoubleLine Short Duration Total Return Tactical ETF and SPDR DoubleLine Total Return Tactical ETF.
Last year, DoubleLine decided to take matters into its own hands by launching its own-branded funds. First was the DoubleLine Opportunistic Bond ETF (DBND), which is a go anywhere vehicle to find the best opportunities among various fixed income sectors. Second was Shiller CAPE U.S. Equities ETF (CAPE), which uses Gundlach’s favorite measure for pricing stocks.
DoubleLine Doubles Its Offerings
This year, DoubleLine launched two more funds, effectively doubling its own suite of ETFs. These two new funds take a very sector-specific approach: real estate. Gundlach has long been a fan of MBS in both the housing and commercial real estate sectors, with MBS featuring prominently among many DoubleLine mutual funds and managed products. So, it’s no surprise the fund company would look here for exposure
The DoubleLine Commercial Real Estate ETF will invest in senior commercial real estate debt through investment-grade Agency and non-Agency CMBS, as well as commercial real estate collateralized loan obligations (CRE CLOs).
The DoubleLine Mortgage ETF will invest high-quality residential mortgage-backed securities (RMBS) among government-backed Agency mortgage-backed securities, as well as non-Agency and bank-issued mortgage bonds.
Active Management Is Key
The timing of the new ETFs could give investors a bit of a pause. Thanks to the Fed’s latest tightening cycle, real estate trends have been heading downward.
Thanks to higher borrowing costs—a 30-year fixed mortgage is now at 7.01%—mortgage applications, new home construction, existing home sales, and other data have continued to drop for several quarters. Banks have also stepped up underwriting standards in the wake of recent bank failures. This has hurt the residential side of the equation.
The commercial side doesn’t appear much better. Work from home schemes and major layoffs in office-heavy markets have also hurt commercial property values. Delinquencies and defaults have risen as property owners have become strapped for cash. We’ve already begun to see some owners walk away from retail and office properties in several markets.
But according to DoubleLine portfolio manager Morris Chen, “It’s a perfect time, because with all this negative sentiment, you’re seeing a lot of unique opportunities.” This is where both ETFs can find a real footing.
Both funds are actively managed. Investors buying the indexed iShares CMBS ETF are stuck with everything: the good, the bad, and everything in-between. This is not the case, with the new DoubleLine funds. For example, the CMBS portfolio is managed through security selection across property types and subsectors. This includes analysis at the individual property level. The same could be said for the residential fund, which can shift between Agency and non-Agency bonds, while managing credit and prepayment risks.
Because the new ETFs don’t have to look like their benchmarks, the teams at DoubleLine can comb through the wreckage and find the best opportunities. This can be bonds trading for higher-than-normal yields, those that feature strong cash flow fundamentals, or property types that have good long-term prospects. Given the fragmented nature of fixed income markets, active management can play a serious role in building a better portfolio and produce higher returns in the asset class.
And DoubleLine has done a pretty good job at that.
While the fund company doesn’t offer any exclusive MBS or CMBS mutual funds, real estate bonds dot nearly all its portfolios and, in many, account for the bulk of the assets. For example, the previously mentioned Total Return has about 82% of its portfolio in various MBS/CMBS bonds. The fund has also managed to crush the Bloomberg U.S. Aggregate Bond Index.
The same teams that managed the MBS bond exposure will also be managing it in the two new ETFs.
Here's a list of some top-performing DoubleLine funds
| Name | Ticker | Type | Actively Managed? | AUM | YTD Ret (%) | Expense |
|---|---|---|---|---|---|---|
| DoubleLine Shiller CAPE U.S. Equities ETF | CAPE | ETF | Yes | $102 million | 14.6% | 0.65% |
| DoubleLine Opportunistic Bond ETF | DBND | ETF | Yes | $133 million | 1.8% | 0.5% |
| SPDR DoubleLine Total Return Tactical ETF | TOTL | ETF | Yes | $$2.36 billion | 1.4% | 0.55% |
| SPDR DoubleLine Short Duration Total Return Tactical E | STOT | ETF | Yes | $135 million | 1.3% | 0.45% |
| DoubleLine Total Return Bond Fund | DBLTX | Mutual fund | Yes | $39.3 billion | 1.1% | 0.5% |
| DoubleLine Commercial Real Estate ETF | DCMB | ETF | Yes | $26.5 million | 1.01% | 0.39% |
| DoubleLine Mortgage ETF | DMBS | ETF | Yes | $99.8 million | 0.8% | 0.49% |
The Bottom Line
DoubleLine’s new ETFs underscore how active management can be applied in downtrodden sectors. With both residential and commercial real estate bonds facing headwinds, it takes an active touch to find the opportunities. With a long history of doing that, DoubleLine may have some big hits on their hands. For investors looking to spice up their real estate portfolios or add some bonds to their fixed income sleeves, the new active ETFs could be solid winners.
