Most bond prospectuses warn that you could lose money if the borrower fails. A new Lazard prospectus warns that you could lose everything even if the borrower does not.
Lazard Hybrid Financial Income ETF (HYFY, Nasdaq)
The fund puts at least 80% of its assets into what Lazard calls hybrid securities issued by financial companies: preferred shares, capital securities, subordinated debt and, most interestingly, contingent convertibles. These are the bonds banks issue precisely so that they can stop paying them when things go wrong.
The prospectus is admirably candid about how this works. A CoCo is structured to convert into equity or have its principal written down, “potentially to zero”, when a capital ratio falls below a threshold or a regulator decides, “at its discretion”, that the bank has reached the point of non-viability. In that event, the fund “may suffer a complete loss on an investment in CoCos with no chance of recovery even if the issuer remains in existence.”
That last clause is not theoretical. The most famous AT1 write-down in history saw Credit Suisse’s AT1 holders receive nothing while its shareholders, who sit below them in every textbook ever written, walked away with something. Anyone who held those bonds learnt that the capital structure is a suggestion and the trigger clause is the law.
In exchange, CoCos pay more than a bank’s ordinary debt, and the fund may hold below investment grade and unrated securities “without limitation”, with no maturity or duration restriction. The focus is Europe and North America. The fee is 0.60%, all in.
Lazard Non-Dollar Active Income ETF and Lazard US High Yield ETF (XDLR, Nasdaq, and HYB, NYSE Arca)
The siblings are more conventional, though not by much. The non-dollar fund invests at least 80% in bonds denominated in anything other than US dollars, from governments, agencies, supranationals and companies, emerging markets included. The prospectus notes that it is “permitted to invest all or a substantial portion of its assets in junk bonds issued by foreign governments”. The fee is 0.50%.
The high yield fund is the interesting one structurally. It is a conversion of the $138.1 million Lazard US High Yield Portfolio, a mutual fund, and the filing states that “no shareholder vote is required to complete the Reorganization”. The good news for those shareholders is that the management fee falls from 0.55% to a unitary 0.39%, which is the rare case of a fund changing wrapper and getting cheaper. I recently wrote about GMO adding an ETF that cost more than its mutual fund. Lazard has gone the other way.
Lyrical U.S. Value Equity ETF and Lyrical International Value Equity ETF (LYR and LYRI, NYSE Arca)
Lyrical’s US value fund has converted from a mutual fund to an ETF, bringing a screen that “can trace its origins back to 1996” and a portfolio that, at the predecessor fund’s last reported sector count, held 35.5% in technology. A third in tech is not what most people picture when they buy a value fund, and that is rather the point. Lyrical defines value by price, not by sector.
Each stock’s fair price comes from applying a normalised multiple to five years of forward normalised earnings, and the manager then looks for businesses “where it believes the investment controversy to be temporary”. Run that screen across the largest 1,000 US companies and it will buy whatever looks cheap against its future earnings, and if that turns out to be technology, so be it. The style box may say growth. The arithmetic says value, and it will be interesting to see whether the maths is correct. That philosophy may apply to the ETF wrapper too. Lyrical previously launched a US value ETF and closed it, increasing its cash holdings during the wind-down, “diverging from its stated investment objective”. It is back, with a different structure and a longer track record attached.
The international fund uses the same screen on the top 1,500 developed-market companies, adds a target-price sell rule, and turned over 109% of its portfolio in its last year as a mutual fund, against 32% for the US fund. Both charge 0.75%.
Delisted: Tradr 2X Long SK hynix Daily ETF and Tradr 2X Short SK hynix Daily ETF (SKHA and SKHN, Cboe BZX)
Tradr has delisted both of its leveraged SK hynix funds, and they are being liquidated, with remaining assets returned to shareholders in cash. There is a particular kind of failure that only leveraged ETFs can achieve, and this pair has achieved it. SK hynix’s American shares rose by around 5% over the funds’ life. The long fund still fell by more than 5%. The short fund, which was at least supposed to lose money in that scenario, fell by 42%.
This is volatility decay, explained in every leveraged ETF prospectus and believed by almost nobody until it happens to them. Daily reset funds do not deliver twice the return over any period longer than a day, and a stock that swings violently while going nowhere much will punish both the bulls and the bears. The memory chip giant obliged, falling more than 30% from its peak along the way.
The pair lasted just over three months before delisting, with around $1.26 million between them at the end. Tradr’s own fund pages still describe the products as for “sophisticated investors and professional traders with high conviction views”, without mentioning that the conviction no longer has anywhere to go. Rival SK hynix leveraged funds from other issuers remain open, which suggests the problem was less the idea than the timing.
Delisted: USCF Oil Plus Bitcoin Strategy Fund and USCF Energy Commodity Strategy Absolute Return Fund (WTIB and USE, NYSE Arca)
USCF has delisted both funds as part of a board-approved liquidation of five of its ETFs. Shareholders still holding at the end receive cash at net asset value. The board gave no reason in the liquidation notice, and for the oil and bitcoin fund at least, none was really needed.
The pitch was that two volatile assets with different drivers would be better together. Investors appear to have concluded that if they wanted oil they would buy oil, and if they wanted bitcoin they would buy bitcoin, and that a fund offering both at once was answering a question that nobody had asked. Its sibling, which used energy futures to pursue an absolute return, leaves with rather less to say about it.
Nomura Strategic Income ETF and Nomura Small and Mid Cap ETF (MFIX and SMDC, NYSE Arca)
Nomura’s income fund has a set of investment limits that reads like a disclaimer written by an optimist. It may invest up to 100% in high yield bonds, up to 100% in foreign securities and up to 100% in non-dollar currency exposure. The high yield sleeve is run on what the sub-adviser calls a “Strong Horse” philosophy, which means finding companies that can carry their debt through the cycle. Net of waivers, the fee is 0.41%.
The small and mid cap fund deserves a moment for its definitions. Small caps are those resembling the Russell 2500, which the prospectus puts at roughly $45 million to $30.6 billion. Mid caps run from about $717 million to $92.6 billion. A company worth $92 billion would be bigger than most members of the FTSE 100, and here it qualifies as mid-sized.
L&G Emerging Markets Quality Dividends UCITS ETF (DEMM, London Stock Exchange)
I recently wrote about an emerging markets fund that holds three stocks and has promised not to hold a fourth. This one tracks an index of 609 constituents, holds 575 of them through optimised sampling, and has its ten largest positions adding up to just 3.57% of the portfolio.
The recipe is profitable, dividend-paying emerging market companies, with some ESG exclusions, physically held, unhedged, for 0.45% a year. There is no trigger clause, no volatility decay and no 100% limit on anything. It will pay its dividends, wobble with emerging markets as emerging markets do, and generate no headlines whatsoever, which is precisely what most people buying an emerging markets fund should want from it.
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