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.
The NuShares Enhanced Yield U.S. Aggregate Bond ETF (NYSEArca: NUAG) may help fixed-income investors take an alternative approach to bond investing as 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.
Investors may also look to equity strategies as a way to augment their income needs. For example, the Hedged Dividend Income ETF (NYSEArca: DIVA), which tracks the INDXX Hedged Dividend Income Index, is designed to deliver to investors a strong current yield capital appreciation potential with a risk profile similar to a corporate bond index.
The fund holds 100 equally weighted securities within the universe of the largest 1000 US stocks that have paid consistent or growing dividends and which have the highest dividend yields. Additionally, the fund shorts approximately 150 to 200 stocks, within the same universe, that have the lowest-to-no dividend history and low yields. Due to its indexing methodology, investors may find higher yields than dividend stocks while potentially hedging against volatility of equity markets.