ETFs to Deconstruct the AGG and Hedge Currency

The iShares Core US Aggregate Bond ETF (NYSEArca: AGG) tracks the investment results found in the Bloomberg Barclays U.S. Aggregate Bond Index, which can give fixed income investors broad exposure to the bond markets.

However, there are times when higher yields can be extrapolated from deconstructing the AGG, particularly in a current economic climate that warrants a spike in interest rates.

Companies like WisdomTree Investments offer exchange-traded funds that capitalize on the strategy of deconstructing the AGG, which pertains to an investment strategy that corners a specific portion of the bond market sectors–government debt via Treasuries, agencies, credit, mortgage-backed securities (MBS), commercial mortgage-backed securities (CMBS), and asset-backed securities (ABS).

“We believe deconstructing and reassembling the AGG can be done systematically to deliver competitive performance and create investment exposures that better align with investor objectives,” Rick Harper, Head of Fixed Income at WisdomTree Investments, told “Thoughtful yield enhancement through enhanced strategies and risk mitigation through interest rate hedged strategies are just two ways in which packaged solutions can be incorporated into investor portfolios in performing against the AGG.”

Related: Bond Markets Watching How Trade Disputes Impact Rates

Deconstructing the AGG allows exposure to various sectors of the bond market where yields are higher, but it may come with an investor’s willingness to accept more risk. WisdomTree has two ETFs using the deconstruction strategy–WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (NYSEArca: AGGY) and WisdomTree Yield Enhanced U.S. Short-Term Aggregate Bond Fund (BATS: SHAG)–to focus on a specific segment of the bond market, especially when short-term rate movements make their impact felt.

“Interest rate sensitivity is a significant driver of returns for core fixed income strategies and various investment strategies have been developed to give investors greater control over this risk,” said Harper.

Deconstructing the AGG can be a case of auspicious timing if implemented now, particularly when current Treasury yields have been relatively flat. As such, AGG has been on a downtrending path the past 12 months.