For many investors, the Barclays U.S. Aggregate Bond Index serves as the most recognized benchmark for fixed income returns. However, in the low-interest rate environment of recent years, investors have increasingly looked outside the Agg to supplement income in meeting their investment goals.
In doing so, they introduce additional risks and different sources of volatility that need to be carefully understood. In response, WisdomTree collaborated with Barclays to create a rules-based index—the Barclays U.S. Aggregate Enhanced Yield Index (Agg Enhanced Yield)—that broadly retains the risk characteristics of the Agg while enhancing the income potential of the portfolio.
Enhancing Income Potential of the Agg
Yield can typically be increased by shifting exposure along any of a number of risk dimensions, including sector exposure (Treasury, agency, credit, securitized), interest rate risk (duration) and credit risk.
The Agg Enhanced Yield uses a rules-based approach to reallocate across 20 distinct subcomponents in the Agg, seeking to enhance yield while maintaining a similar risk profile. This strategy allows an investor to focus on the investment-grade credit universe, without having to dip into the high-yield segment of the market to enhance yield potential.
Yield and Duration Comparison, June 30, 2015
As we show above, the Agg provides a variety of opportunities for income across various sectors and interest rate risk profiles.
• Across the yield curve, debt guaranteed by the U.S. government tends to have the lowest levels of yield per unit of interest rate risk.