In a shifting interest rate environment, with the Federal Reserve eyeing a tighter monetary policy ahead, fixed-income ETF investors have to adapt to the changing market and look beyond the potential short-comings of traditional benchmarks like the Bloomberg Barclays U.S. Aggregate Bond Index, or so-called Agg.
For instance, the NuShares Enhanced Yield U.S. Aggregate Bond ETF (NYSEArca: NUAG) may help fixed-income investors take an alternative approach to bond investing.
“NUAG is a new way of looking at the aggregate bond market – hence the ‘new Agg’, and it’s really looking at the Agg bond market from a yield perspective,” Martin Kremenstein, Senior Managing Director of ETFs for NuShares from Nuveen, said at the recent Morningstar ETF Conference.
The Enhanced Index does not weight components by market capitalization, instead opting to assign components into a variety of categories based upon asset class, sector, credit quality and maturity. The smart beta indexing methodology then utilizes a rules-based process to include higher weights to categories with higher yields while maintaining risk and credit quality at levels similar to the Base Index.
NUAG seeks to offer enhanced yield relative to the broad, investment-grade fixed income market with comparable risk and credit quality by reflecting the BofA Merrill Lynch Enhanced Yield US Broad Bond Index (Enhanced Index), which is designed to broadly capture the U.S investment grade fixed income market.
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.
“You know we have a big research team part of our fixed-income division – I think we run to close to a quarter of a trillion dollars in taxable fixed-income under TIAA, and within that, they’ve been look at what are the factors that drive fixed income,” Kremenstein said. “In the aggregate, in the investment-grade bond universe, they really found that yield was the biggest driver of returns in the long-term, so they came up with the idea of re-weighting the constituent buckets of the Agg by yield.”
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