As the financial industry evolves and the markets environment shifts, fund sponsors have developed a number of strategies and innovative index-based exchange traded funds that have affected the way financial advisors build their investment portfolios.

Shaun Wurzbach, Global Head of Financial Advisor Channel Management at S&P Dow Jones Indices, spoke with Tom Lydon, Editor and Publisher of ETF Trends, to talk about the fixed-income space and ongoing innovation in the ETF space.

To start off, most financial advisors and investors typically center their strategy around the benchmark Barclays Agg, or Bloomberg Barclays Aggregate Bond Index, as their guidepost. However, the Agg’s market exposure has changed over the years, and not for the better.

“Most don’t understand that the Barclays Agg has changed a lot since the end of the financial crisis,” Lydon said. “The duration has doubled and the credit quality is decreased, so there’s a lot more risk there and we’re at the end of a 30-year bull market.”

Financial advisors will have to better understand the market environment and how the Barclays Agg will be affected in the days ahead. Consequently, there is an opportunity to carve out areas that might be more exposed to upcoming risks, notably long-term Treasury exposure, Lydon said.

However, investors are not left out to dry. There are now a number of smart beta or alternative index-based ETF strategies and ETFs that access securities outside the range of traditional Barclays Agg exposure to help fixed-income investors limit risks and potentially enhance returns.

“You can diversify in other areas,” Lydon said. “There’s some smart beta strategies that have, in fact low, duration or even negative duration when you can diversify in certain areas. Going outside the U.S., emerging market bonds, for example, are very fairly priced but it will offer a great yield.”

As more smart beta grows in popularity, more investors and financial advisors are beginning to incorporate these alternative index-based ETF strategies into a diversified portfolio. These types of smart beta strategies often provide disciplined investment approaches that could limit short-term drawdowns and potentially enhance long-term returns.

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