Traditional fixed-income index investments may expose investors to increased credit risks and lower yields. Consequently, more may turn to smart beta index-based exchange traded funds that may diminish risks and potentially enhance returns in a rising rate environment.
ETF Trends publisher Tom Lydon spoke with Martin Kremenstein, Senior Managing Director and Head of NuShares Nuveen, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk Nuveen’s recently launched ETF alternative to the benchmark Barclays U.S. Aggregate Bond Index, the NuShares Enhanced Yield U.S. Aggregate Bond ETF (NYSEArca: NUAG).
“The strategy which is designed to extract yield from the portfolio within parameters really held up well in the rate volatility following the election,” Kremenstein said.
NUAG seeks to offer enhanced yield relative to the broad, investment-grade fixed income market with comparable risk and credit quality.
“I think all advisors need to look at their fixed income now but can’t not be in bonds,” Kremenstein said. “They have to have a bond allocation and they’re going to have to look it up on allocation to see whether it’s really working for them.”
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.
“Find a product that really allocated yield. [Investors] can hopefully hope to ride out some of the worst of the rising rate effect but still pick up the return of their investment needs,” Kremenstein said.
Additionally, Nuveen has launched a line of ETFs that screen companies of various market capitalization and asset categories for environmental, social and governance principles, such as the NuShares ESG Large-Cap Growth ETF (BATS: NULG), which seeks to track the investment results, before fees and expenses, of the TIAA ESG USA Large-Cap Growth Index
“ESG is something that really goes to the heart of our parent company,” Kremenstein said. “We’ve been running ESG annuities, I think, since the 1990s. We have a big ESG research team.”
The ETFs tap into the “credibility and rigor of our ESG research team,” Kremenstein added.