ETF Trends
ETF Trends

Many have turned to the benchmark Barclays Aggregate Bond Index as a guiding beacon for their fixed-income allocations, but the current low-yield environment has caused investors to rethink the way they gain exposure to bonds and exchange traded funds.

ETF Trends publisher Tom Lydon spoke with Jordan Farris, Head of Product Development at NuShares from Nuveen, at the 2017 Morningstar Investment Conference in Chicago April 26-28 to talk the changing views on optimal fixed-income asset allocations.

“Allocations within the Barclays Agg have gone sort of against what I think a lot of investors are looking for these days, which is yield,” Farris said. “If you look back over the past 20 or 30 years, the majority of the return on the Barclays Agg has actually been by the yield or the coupon.”

The Barclays Agg’s yield is only a shadow of its past, diminishing the appeal for what many yield-seekers are looking for. This is especially the case as the baby boomer generation are easing into retirement and more are demanding steady yielding assets to help them through their Golden Years. Moreover, we are living longer and many are entering retirement with more debt than their parents, which further fuel the need for income.

“We’re in a period of time when the baby boomers are starting to retire – 10 to 12 thousand of them per day,” Farris said, “and they’re looking for more yield in their investments. Even though rates are starting to go up, we’re still at historic lows for rates.”

Consequently, investors may turn to exchange traded fund strategies that can potentially help generate more attractive returns or yields. For instance, Nuveen recently launched an ETF alternative to the benchmark Barclays U.S. Aggregate Bond Index, the NuShares Enhanced Yield U.S. Aggregate Bond ETF (NYSEArca: NUAG). NUAG seeks to offer enhanced yield relative to the broad, investment-grade fixed income market with comparable risk and credit quality.

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.

Compared to the benchmark Barclays US Aggregate Bond Index, NUAG has a more underweight Treasuries exposure, but the Nuveen bond ETF overweights corporate debt and securitized debt. Given its lower triple-A Treasury exposure, NUAG has a lower overall credit quality exposure, with a greater tilt toward BBB-rated debt. However, due to its emphasis on corporate debt, along with slightly greater credit risk, the Nuveen ETF offers a higher yield, compared to the Barclays Aggregate Bond Index.

NUAG shows a 6.16 year effective duration and a 2.66% 30-day SEC yield.