A Smart-Beta ETF Alternative for Core Fixed-Income Exposure

For example, the recently launched NuShares Enhanced Yield U.S. Aggregate Bond ETF (NYSEArca: NUAG) tries to reflect the performance of the BofA Merrill Lynch Enhanced Yield U.S. Broad Bond Index, which uses a rules-based methodology that allocates higher weights to securities and sectors with a higher potential yield while maintaining comparable risk. The strategy is based on the so-called carry theme, or the tendency for higher-yielding assets to provide higher returns as we have witnessed over the past decade.

The underlying index’s weighting is “based on yield. Assigns underweights or overweights at each subgroup level in an effort to enhance yield while maintaining comparable risk,” Jordan Farris, Vice President and Head of ETF Product Development at Nuveen, said.

Compared to the base index, the smart beta Enhanced Yield U.S. Broad Bond Index has a slightly greater tilt toward BBB investment-grade corporate debt, with a significant underweight toward AAA-rated U.S. Treasuries, which has helped NUAG generate higher yields.

“NUAG offers investors enhanced yield potential relative to the taxable U.S. investment grade fixed income market with comparable levels of risk and an alternative to market-cap weighted strategies,” DiSano said.

Looking ahead, most financial advisors plan on shortening their fixed income exposure or even decreasing allocations. In a survey of financial advisors attending the webcast, 29% indicated they plan on cutting down fund duration to limit the negative effects of rising interest rates while 20% plan on decreasing fixed income exposure.

Financial advisor who are interested in learning more about the fixed-income market can watch the webcast here on demand.