Figure 2: Downward Trend in Bond Coupon Rates
Barclays U.S. Aggregate Index Coupon Rate: 12/31/98-2/28/15
For definitions of terms in the chart, visit our glossary.
While the timing of an increase in rates remains unknown, we believe that rates may be poised to rise sooner than the market currently expects. At the very minimum, investors should review the level of interest rate sensitivity in their portfolios and assess whether it is consistent with their view of the likely path of interest rates. Strategies that combine traditional bond exposures with interest rate hedges (zero duration) or strategies that “over-hedge” interest rate risk below zero (negative duration strategies) can be bundled efficiently via exchange-traded funds.
1Proxied by the Barclays U.S. Aggregate Index, as of 2/28/15.
2Sources: WisdomTree, Bloomberg, as of 2/28/15.
3Source: WisdomTree, as of 2/28/15.
4Source: Bloomberg, as of 2/28/15.
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. The Fund seeks to mitigate interest rate risk by taking short positions in U.S. Treasuries, but there is no guarantee this will be achieved. Derivative investments can be volatile, and these investments may be less liquid than other securities and more sensitive to the effects of varied economic conditions.
Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. The Fund may engage in “short sale” transactions of U.S. Treasuries, where losses may be exaggerated, potentially losing more money than the actual cost of the investment, and the third party to the short sale may fail to honor its contract terms, causing a loss to the Fund. While the Fund attempts to limit credit and counterparty exposure, the value of an investment in the Fund may change quickly and without warning in response to issuer or counterparty defaults and changes in the credit ratings of the Fund’s portfolio investments. Investing in mortgage- and asset-backed securities involves interest rate, credit, valuation, extension and liquidity risks and the risk that payments on the underlying assets are delayed, prepaid, subordinated or defaulted on. Due to the investment strategy of certain Funds, they may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.