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DoubleLine's ETF Fee Is Too High, or Others Are Too Low

(Bloomberg Gadfly) -- DoubleLine's $3 billion debt exchange-traded fund has stood out since it was started last year. The SPDR DoubleLine Total Return Tactical ETF hasn't had a day of withdrawals. It has grown at an incredible pace even in the world of bond ETFs, which have attracted a record $70 billion of flows just this year through August.

This fund has distinguished itself in another way as well: Its shares have been trading at persistently higher levels than the value of its assets. This is fairly rare itself, but the reason for this distortion is even more noteworthy. ETF premiums usually result from a surge in demand for the shares or a disruption in the funds' holdings. But in the DoubleLine fund's case, "this is due to an increase in the cost of creating new shares," said Eric Balchunas, a Bloomberg Intelligence analyst.

In other words, the ETF is passing along the costs associated with trading in the underlying debt, and it turns out that charge is significant. In August, State Street, which distributes the fund's shares, decided to increase the fee to 0.35 percent for investors using cash to create new shares in the DoubleLine ETF, up from 0.05 percent before. That's among the highest creation fee among State Street's ETFs.

The effect of this has been noteworthy. Since then, investors have paid a much bigger premium to buy the shares, at an average 0.4 percent more than the value of its holdings would suggest. The current average premium for U.S. fixed-income ETFs more generally is a mere 0.09 percent, according to Bloomberg data.

Why is this significant? Well, it raises a few important questions.

For starters, how do other funds manage their transaction costs? Who bears the brunt? It's no secret that it can be expensive to trade in debt markets, which are conducted in large part over the phone and in emails, away from exchanges. And yet most debt-market ETFs don't have such a big charge to create new shares. For the DoubleLine fund, State Street sets the fee and DoubleLine manages the strategy. State Street reviews the creation and redemption fees on its ETFs regularly, while some distributors set them daily.

Next, this fee on the DoubleLine fund raises the question of whether these fees are the right amount to offset potential trading costs. The Securities and Exchange Commission has approved a rule allowing mutual-fund managers to charge investors for withdrawing or depositing money during times of heavy outflows or inflows. So this is a particularly salient question.

On the face of it, State Street's measure looks like a prudent one to protect the fund's existing shareholders. After all, one big complaint about open-ended funds is that long-term investors get penalized for badly timed moves of other fund investors. But it also highlights the bright dividing line between DoubleLine's fund and the rest of the ETF industry. Either the DoubleLine fund is charging a notably high transaction fee, or other funds that transact in less-liquid debt markets are less explicit about who bears those costs. Just because some funds don't have a clear-cut fee to offset transaction costs doesn't mean those charges don't exist. Perhaps they're just usually borne by the most faithful shareholders.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.


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