Eric Balchunas: The Janus Henderson Mortgage-Backed Securities ETF. JMBS is the ticker, and basically, this is investing in agency mortgage-backed securities. Although, look. It can go 20% into other areas, right, so a little more risky. And the big thing to know about this one is it's active. Look, actively managed, yes, right. So most of the big mortgage-backed securities ETFs are passive. So you're getting cheap active here.

Let's look at the holdings and what it holds. Here, this is basically agency-backed mortgage-backed securities. Down here is where you're going to get some of the other stuff. It also uses a little leverage. So again, you're rolling the dice, trying to do better than the benchmark.

Scarlet Fu: John Kerschner, Head of Securitized Products at Janus Henderson. And, John, you heard Eric explain the basics of JMBS. Make the case for why one would want to include this product in their portfolio in this kind of market environment, when rates are rising and things are so volatile.

John Kerschner: Yeah, when we go out and talk to our investors, we're basically hearing two things. One, investors are worried about higher interest rates and also corporate credit. Nowadays, with the yield curve very flat and the corporate credit curve very flat, you can invest in a mortgage-backed securities ETF like this relatively low fee. Not have to worry about the corporate credit risk in a lot of portfolios.

Balchunas: And I know agency is the bulk, but just mortgage-backed securities in general, I think makes people think of the great financial crisis.

Kerschner: Yes, it does.

Balchunas: Let's focus on that 20%. What are you doing there? And should people – like how much risk are you taking on there?

Kerschner: Actually, very little risk, particularly, credit risk, in that bucket. I mean, right now there is non-agency mortgage-backed securities, often known as prime jumbo, or non-QM, non-qualified mortgages. Still good borrowers, but oftentimes they trade very inefficiently, and we can go out and buy those mortgages and add to this ETF.

Fu: So when people hear mortgage-backed securities, as Eric was saying, they get flashbacks of 2008. It doesn't inspire a lot of good feelings. How have these products changed, or have they, since the financial crisis?

Kerschner: Well, you know, the non-agency mortgage-backed security market was as high as $2.1 trillion, back before the crisis. Now it's only a few hundred billion. Now anytime you're making a loan that's not a Fannie Mae or Freddie Mac or a Ginnie Mae loan, it's to high-quality borrowers that maybe are self-employed, can't qualify for a Fannie Mae or Freddie Mac mortgage, but still high credit quality.

Balchunas: And let's talk about active-passive. You know, bond managers are still doing great in this sort of passive era. They're taking in money, $51 billion this year. Stock pickers, it's been brutal, it's a huge disparity. Talk a little bit about why you think that is. Why do advisors not have the same feelings for bond managers as they do for stock pickers?

Kerschner: Well, history has taught us that bonds are more inclined for active management. And the reason for that is, for a stock index, you can go out there and buy all the stocks in the weightings of that index – and replicate the index very cheaply and very accurately. Most bond indices have thousands of bonds, and you literally cannot go out and buy all the bonds in the index. So it lends itself to active management.

Fu: So you have to be choosy and selective. You know, we're talking about Janus fund managers. And of course, when we talk about that, I think of Bill Gross. But it's Bill Gross 2.0 because Bill Gross 1.0 is PIMCO.

Balchunas: Yeah, I mean he's not having a great year. I kind of compare him to Michael Jordan on the Washington Wizards, like that era. But still, he is a legend. And why wouldn't you roll out a fund managed by him? I'd imagine it would at least give you some attention and make a splash.

Kerschner: Yeah. We understand that. I mean, I'm not going to talk for Bill, just like I wouldn't want him to talk for me. But let's just say this, you know. No PM – portfolio manager – wakes up in the morning and says, "I'm going to start an ETF today." This is hundreds of hours, takes hundreds of people, compliance, legal. So we have a big team at Janus Henderson. We're constantly thinking of new ideas in the ETF space.

The opinions and views expressed are as of 11/1/18 and are subject to change without notice. They do not necessarily reflect the views of others in Janus Henderson's organization and no forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes and are not an indication of trading intent. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector.
Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, please call Janus Henderson at 800.668.0434 or download the file from janushenderson.com/info. Read it carefully before you invest or send money.
ETF shares are not individually redeemable and owners of the shares may acquire those shares from the Fund and tender those shares for redemption to the Fund in Creation Units only.
OBJECTIVE: Janus Henderson Mortgage-Backed Securities ETF (JMBS) seeks a high level of total return consisting of income and capital appreciation.
The ETF is new and has less than one year of operating history.
Investing involves risk, including the possible loss of principal and fluctuation of value. Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Mortgage-backed securities (MBS) may be more sensitive to interest rate changes. They are subject to extension risk, where borrowers extend the duration of their mortgages as interest rates rise, and prepayment risk, where borrowers pay off their mortgages earlier as interest rates fall. These risks may reduce returns.
Funds that concentrate investments in a single sector will be more susceptible to factors affecting that sector and may be more volatile than less concentrated investments or the market as a whole.
Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss.
Fannie Mae is Federal National Mortgage Association. Freddie Mac is Federal Home Loan Mortgage Corporation. Ginnie Mae is Government National Mortgage Association.
Janus Capital Management LLC is the investment adviser and ALPS Distributors, Inc. is the distributor. ALPS is not affiliated with Janus Henderson or any of its subsidiaries.
Janus Henderson is a trademark of Janus Henderson Group plc or one of its subsidiary entities. © Janus Henderson Group plc.
FOR MORE INFORMATION CONTACT JANUS HENDERSON 151 Detroit Street, Denver, CO 80206 800.668.0434 | www.janushenderson.com
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