Colorado dips its toe into fixed income ETF investment

Colorado Public Employees' Retirement Association, Denver, has begun investing in fixed income ETFs this year to take advantage of any short-term opportunities that could arise within core bonds, said Amy C. McGarrity, chief investment officer.

The $63 billion pension fund last year decided to invest in fixed-income exchange traded funds when trading volumes increased during the market dislocation at the start of the COVID-19 pandemic shutdowns, Ms. McGarrity said in a phone interview.

Although the plan's exposure to ETFs is small – currently about $110 million in core fixed-income ETFs – the fixed-income team at PERA that manages the overall portfolio internally hopes they will give the plan access to short-term opportunities in the fixed-income market.

"The fixed-income team is using ETFs to gain opportunistic exposure to broad sectors," said Ms. McGarrity. "The ETFs allow us to gain sufficient exposure rather than the cash market."

Ms. McGarrity added that the fixed-income team could also invest in core-plus ETFs, though they're "not looking to establish strategic allocations to plus sectors."

While the fixed-income team hopes that its investment in ETFs will be additive to returns, Bessie Conty, assistant director of fixed income at Colorado PERA, said in a separate phone interview that the team expects most of its excess returns to be generated through in-house securities management. "ETFs are a small portion of our portfolio," Ms. Conty said. "It's another tool."

Colorado PERA manages 55% of its total assets in-house and has allocations of 58.8% to global equity, 19.5% fixed income, 8.7% private equity, 7.8% real estate, 4.7% alternatives and the rest in cash.

Currently, PERA has no plans to invest in ETFs outside of the fixed-income asset class, according to Ms. McGarrity, though that's not to say it never will.

Ms. McGarrity explained that PERA manages fixed income and equities a bit differently. While fixed income is run by sectors, the equities team can be more tactical.

"I think one of the reasons why we're using ETFs with fixed income is because fixed income can be less liquid than global equities in general, so ETFs allow them to gain that exposure in those illiquid markets," Ms. McGarrity said.