Investors seeking an easy way to fill out a fixed-income portfolio may start off with an aggregate or total bond market exchange traded fund that provides diversified exposure to U.S. government and corporate debt securities.
For instance, the Barclays U.S. Aggregate Bond Index has been the go-to benchmark for many fixed-income investors. The benchmark tracks U.S. investment-grade corporate bonds, mortgage-backed securities and U.S. Treasuries. However, potential investors should note that the index excludes municipal bonds, Treasury inflation-protected securities and high-yield debt.
However, traditional core bond ETFs often sport low yields due to high allocations to Treasuries and MBS. The WisdomTree Barclays U.S. Aggregate Bond Enhanced Yield Fund (NYSEArca: AGGY) can help investors maintain core fixed income exposure while bolstering yield.
AGGY “attempts to boost return by reweighting the components of the Aggregate Index. But this additional yield is not free. It comes with greater credit risk and often slightly greater interest-rate risk. This trait, coupled with the fund’s short record, limits the strategy to a Morningstar Analyst Rating of Bronze,” according to Morningstar.
The $336.3 million AGGY, which debuted in July 2015, uses a “rules-based approach re-weights the subcomponents of the Bloomberg Barclays U.S. Aggregate Bond Index to enhance yield, while broadly maintaining familiar risk characteristics,” according to WisdomTree.
AGGY holds over 1,500 bonds and has a 30-day SEC yield of 2.93%. AGGY’s effective duration is 6.94 years. Duration measures a bond’s sensitivity to changes in interest rates.
“While the fund does take greater credit risk than its parent benchmark, this risk is still moderate and is more representative of how active managers in the intermediate-term bond Morningstar Category invest,” said Morningstar. “The fund currently allocates roughly half its assets to corporate bonds (20 percentage points more than the Aggregate Index), about 30% to securitized products, and the balance to Treasury securities.”
Nearly 71% of AGGY’s holdings are rated AAA and BBB. The remainder are rated A and AAA, according to issuer data.
For more information on the fixed-income markets, visit our bond ETFs category.