• Next, securitized debt or bonds backed by a pool of receivables such as mortgages can provide a modest lift in yield in exchange for the slightly higher probability that the borrower may default.
• Finally, investment-grade credit can provide an additional increase in yield compared to credit risk-free Treasury debt. In our view, many investors may fail to realize that the Agg could provide greater opportunities for return once they take a closer look at the individual components.
However, if investors simply allocated based on yield, the portfolio would be significantly over-weight credit and interest rate risk. In our view, this naïve approach to fixed income does little to enhance an investor’s prospects for return.
Through our approach to the Agg, when a variety of constraints focused on risk management are applied, the output of the Index methodology resulted in a portfolio with an additional 75 basis points (bps) of income potential, while retaining a similar interest rate risk profile to that of the Barclays Agg.1 This incremental yield advantage is typically achieved through increased exposure to corporate and securitized debt and reduced exposure to U.S. Treasury securities. The implementation of relative sector and quality constraints, however, also helps the Index preserve the diversification potential of a broad-based, core fixed income strategy.
There’s an Exchange-Traded Fund for That
With the launch of the WisdomTree Barclays U.S. Aggregate Bond Enhanced Yield Fund (AGGY) on July 9, 2015 WisdomTree packaged this unique approach in an exchange-traded fund (ETF). AGGY is listed on the New York Stock Exchange with a net expense ratio of just 12 bps.2 By searching for income within the investment-grade universe, AGGY could represent a step forward for investors looking to generate greater income potential while broadly retaining the risk characteristics of familiar core fixed income portfolios.
1Source: Barclays, as of 6/30/15. Income potential comparison based on the yield to maturity of the Barclays U.S. Aggregate Index and the Barclays U.S. Aggregate Enhanced Yield Index.
2Gross expense ratio 0.20%. The net expense ratio reflects a contractual waiver of 0.08% through 12/31/16. Ordinary brokerage commissions apply.