Like most of the bond market, Jeff Gundlach thinks the Federal Reserve will continue to raise interest rates this year. What's a little unusual is the way the bond guru, whose firm manages more than $100 billion, is playing the anticipated hikes in his DoubleLine mutual funds, and especially in the $3.1 billion SPDR DoubleLine Total Return Tactical exchange-traded fund Ticker (TOTL).
Gundlach, CEO of DoubleLine Capital, is betting that the best way to play the coming rate hikes is by holding lots of mortgages, which comprise nearly 60 percent of the holdings of the ETF. That includes residential mortgage bonds, commercial real estate debt and agency securities, according to the latest portfolio holdings disclosure from State Street, sponsor of the ETF. Gundlach has far fewer corporate bonds than the average for funds that track the Bloomberg Barclays U.S. Bond Aggregate Index, according to Morningstar, and far fewer Treasury securities.
Gundlach's two-year-old ETF returned 1.88 percent on an annualized basis from inception on February 23, 2015 through the end of February of this year, according to Morningstar, outperforming the Barclays U.S. Aggregate Bond Index (1.61 percent) and the Barclays Global Aggregate Index (0.70 percent). Gundlach outperformed even as he largely sat out a rally in corporate bonds, led by high-yield "junk" bonds. Credit risks proved to be overstated as the energy bust abated. Whether Gundlach's big mortgage bet is a good strategy now will depend on which types of income investments do best amid rising U.S. interest rates.
"Like other DoubleLine products, [the ETF] has relatively high exposure to mortgages. It's where their experience lies, and it offers something different than the Barclays aggregate," said Todd Rosenbluth, director of ETF and mutual-fund research at CFRA Research in New York.