As fixed-income investors contend with a quickly changing market environment, people should consider allocating toward smart beta or factor based bond exchange traded funds that could better diversify and potentially enhance returns ahead.
For example, the IQ Enhanced Core Bond U.S. ETF (NYSEArca: AGGE) and the IQ Enhanced Core Plus Bond U.S. ETF (NYSEArca: AGGP) incorporates momentum factors to direct investors toward strengthening fixed-income segments in an attempt to enhance returns.
“We are leaders in fixed-income factor investing, providing opportunities in asset classes to potentially enhance returns in current and future environments,” Sal Bruno, Chief Investment Officer IndexIQ, told ETF Trends in a call.
One way to help investors find the best opportunities in the fixed-income market is through momentum investing, Bruno explained.
Specifically, both AGGE and AGGP adhere to a momentum investing strategy where momentum is measured by comparing a short-horizon, 45-day moving average of returns to longer-horizon, 90-day moving average of returns while taking into account recent volatility in each sector. Moreover, the underlying indices weigh each of the fixed-income sectors based on the total return momentum of each sector.
The ETFs employ “a momentum methodology to dynamically allocate assets across U.S. fixed income sectors, overweighting sectors with high momentum and underweighting sectors with low momentum,” according to IndexIQ.
AGGE will act as a core bond position, providing exposure to U.S. Treasuries, U.S. investment grade corporate bonds and U.S. investment grade mortgage-backed securities. Current weights include investment-grade corporate debt 49%, long-term government debt 11.0%, short-term U.S. Treasuries 9% and mortgage-backed securities 9%.
AGGP, like its appellation suggests, provides access to core positions similar to AGGE “plus” up to 25% in U.S. high yield debt and up to 5% in U.S. dollar denominated debt of emerging market issuers. Current weights include investment-grade corporate debt 31%, high-yield debt 25% mortgage-backed securities 14%.
The strategies are rules-based fixed income ETFs that seek to outperform the broad, U.S. taxable, fixed income markets with comparable levels of risk, according to IndexIQ.
For more information on fixed-income strategies, visit our bond ETFs category.