A Momentum Strategy Working Within a Bond ETF

Many smart beta exchange traded fund strategies have found their way into investors’ portfolios but few have been incorporated into fixed-income positions. Nevertheless, the industry is now expanding upon their smart beta offerings to include factor-based bond ETFs to help investors diversify and potentially enhance their portfolios.

For example, the IQ Enhanced Core Plus Bond U.S. ETF (NYSEArca: AGGP) recently passed their 1-year mark after launching on May 10, 2016, and it has outperformed the benchmark Bloomberg U.S. Aggregate Bond Index over the past year and year-to-date.

Investors have also been taken with the smart beta bond ETF strategies, funneling over $240 million into AGGP, making the alternative index-based fixed-income ETF among the most successful new launches over the past year.

Helping the strategy outperform the broader benchmarks, AGGP incorporates momentum factors to direct investors toward strengthening fixed-income segments in an attempt to enhance returns. The ETF adheres to a momentum investing strategy where momentum is measured by comparing a short-horizon, 45-day moving average of returns to longer-horizon, 90-day moving average of returns while taking into account recent volatility in each sector. The underlying factor-based index also weighs each of the fixed-income sectors based on the total return momentum of each sector.

“Momentum-style investing can be applied to fixed income through a dynamic sector allocation strategy using major sector building blocks of the Barclays Agg Index,” according to an IndexIQ research note. “Using a volatility-adjusted crossover signal for the momentum score calculation allows the strategy to compare different sectors on the same basis and avoid fake signals from erratic short-term moves.”