This DoubleLine bond fund is beating the market. Here's what it's buying

A bond fund run by two of the top names at DoubleLine is outpacing the broader market by being defensive without fully committing to an imminent recession. The DoubleLine Opportunistic Bond ETF (DBND) has a total return of 3.2% over the past year. That's more than the broadest bond funds, such as the iShares Core U.S. Aggregate Bond ETF (AGG) , and the category indexes for the ETF as determined by FactSet and Morningstar. The fund has a 30-day SEC yield of about 5%. Jeffrey Sherman, the deputy chief investment officer at DoubleLine, is a portfolio manager on the fund, along with CEO-CIO Jeffrey Gundlach. Sherman told CNBC that the DoubleLine team is seeing signs of a potential economic slowdown but is also not expecting dramatic interest rate cuts from the Federal Reserve. "You shouldn't be betting on a massive expansion at this point. That means that you probably shouldn't be delving down to the riskiest parts of the market. You should probably expect interest rates to stay at these levels for a period of time, which means high quality makes a lot of sense," Sherman said. The fund has positions in Treasurys and agency mortgages that will do very well if the economy weakens, but most of its exposure is in corporate credit, with a tilt toward higher rated issuers, Sherman said. The fund's website says that 41% of the portfolio is in investment grade credit, compared to less than 12% for below investment grade bonds. "Given where yield levels are, you're paid relatively well just to be in the higher credit quality," Sherman said. Bonds that have higher perceived risk tend to have higher yields to lure investors. However, the spreads between safer and riskier debt right now is very tight, Sherman said. As a result, this is the least amount of below investment grade exposure that the DNBD has had since its inception in 2022, and similar strategies in other products at DoubleLine are at their lowest exposure in 14 years, according to Sherman. "We're not finding enough pick-up to really go down in quality," Sherman said. The ETF has a duration of six years, with weighted average life of the bonds at more than seven years. Sherman said that the fund will generally stick to this time exposure but will make active choices on different types of debt. "It should behave like any other intermediate fund. It should zig and zag like that part of the market. So it's not one of those unconstrained funds or anything like that. And when there is something glaringly cheap, we're going to try to overweight that and get exposure to that," Sherman said. The DBND fund has an expense ratio of 0.50% and about $270 million in assets. The fund is part of a growing trend of asset managers putting some of their active investment strategies into ETFs, with bond funds and other income products being some of the most popular.