The enhanced-yield Index is constructed by separating the Agg into 20 components and then reweighting the exposures to maximize yield while adhering to certain constraints. Absent these guardrails, the Index would simply be over-weight credit and duration. The output, as shown below, results in greater weights to the higher-yielding segments of the market, while under-weighting the lower-yielding U.S. government allocations in the Agg.
Enhanced Yield vs. Agg Relative Sector Exposure
As a result, the yield-enhanced Index delivers an additional 70 basis points (bps) of yield compared to the aggregate with a similar volatility profile.3 In our view, this mechanical approach enhances the desirable characteristics of the Agg, while also enhancing the income potential of the strategy. For investors needing to hit minimum income targets, this modification of the Agg could help them achieve their objectives. For managers concerned about the high-yield bond market, this approach also provides higher income potential in an all-investment-grade portfolio.
In today’s uncertain market environment, investors are increasingly looking for ways to enhance the income potential of their portfolios. Through its yield-enhanced approach, WisdomTree seeks to maintain the key characteristics of a popular investment strategy while enhancing its income profile.
1Source: Barclays, as of 6/30/15.
2Sources: Barclays, WisdomTree, as of 6/30/15.
3Source: Barclays, as of 5/31/15.
Important Risks Related to this Article
Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. 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. 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.