Hundreds of new exchange traded funds came to market this year. One of the more interesting elements regarding new ETFs in 2016 was the return to the industry by Nuveen Investments, a division of TIAA Global Asset Management.
In September, Nuveen launched the NuShares Enhanced Yield U.S. Aggregate Bond ETF (NYSEArca: NUAG) as alternative to traditional aggregate bond funds. NUAG seeks to offer enhanced yield relative to the broad, investment-grade fixed income market with comparable risk and credit quality.
Rather than weighting by capitalization, the Enhanced Index assigns component securities into a variety of categories based upon asset class, sector, credit quality, and maturity, and then uses a rules-based methodology to allocate higher weights to categories with the potential for higher yields without significantly increasing risk or decreasing credit quality.
“For its part, NUAG tries to juice the yield of a broad-based bond index while maintaining a similar level of risk. In its very short life–the fund was launched in September–it has succeeded in both regards. That said, it’s still early, and competition in the space is stiff,” said Mornigstar in a recent note.
The need for income is not going away, but investors are suffering from a low-yield environment. Specifically, the baby boomer generation is entering the retirement years, and many are living longer with life expectancy rising, are leading healthier lives with an overall decline in those reporting poor health and are more in debt with more continuing to incur mortgage payments even in retirement.
Compared to the benchmark Barclays US Aggregate Bond Index, NUAG has a more underweight Treasuries exposure, but the Nuveen bond ETF overweights corporate debt and securitized debt. Given its lower triple-A Treasury exposure, NUAG has a lower overall credit quality exposure, with a greater tilt toward BBB-rated debt. However, due to its emphasis on corporate debt, along with slightly greater credit risk, the Nuveen ETF offers a higher yield, compared to the Barclays Aggregate Bond Index.
“There are dozens of Morningstar Medalists in the intermediate-term bond category and more-vanilla passive peers are available at a fraction of the cost. Still, for those looking for just a little more than what they might get from a purely passive exposure and something that will also be a little more reliable (given that it tracks an index), NUAG is worth keeping an eye on,” adds Morningstar.