Many traditional aggregate bond funds, including ETFs, are heavily allocated to U.S. Treasuries and other forms of government debt. That strategy can hinder investors’ ability to get adequate income out of these funds while also introducing the specter of sensitivity to rising interest rates.
Alternatives to conventional aggregate bond ETFs include the WisdomTree Barclays U.S. Aggregate Bond Enhanced Yield Fund (NYSEArca: AGGY). AGGY employs a “rules-based approach re-weights the subcomponents of the Bloomberg Barclays U.S. Aggregate Bond Index to enhance yield, while broadly maintaining familiar risk characteristics,” according to WisdomTree.
AGGY, which turns three years old next month, has $406.6 million in assets under management.
AGGY Offers Higher Yield
While AGGY does not take on excessive credit risk, it does offer investors a 30-day SEC yield of 3.62%, which is higher than typical aggregate bond funds and well above what 10-year Treasuries currently yield.
“While the fund does take greater credit risk than its parent benchmark, this risk is still moderate and is more representative of how active managers in its Morningstar Category invest,” said Morningstar in a recent note. “The fund currently allocates roughly half of its assets to corporate bonds (20 percentage points more than the Aggregate Index), about 30% to securitized products, and the balance to Treasury securities. The Aggregate Index’s Treasuries exposure is around 40%. The portfolio’s duration of 6.9 years is about one year longer than the Aggregate Index’s. Also, this fund’s tilt toward credit enables it to offer a higher yield.”
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Over 77% of AGGY’s holdings are rated AAA or A while another 29% are rated BBB. The ETF features nearly 2,100 bonds.
“To increase its return, the portfolio reweights the components of the Aggregate Index to emphasize the higher-yielding areas of the investment-grade market,” said Morningstar. “This dynamic approach allows the fund to shift its sector exposure (credit, securitized, and government) as sector fundamentals and investor appetites evolve. The portfolio has a few constraints to keep it diversified and prevent it from taking too much risk. These include limiting tracking error to the Aggregate Index, keeping the subcomponent weightings within 20% of the parent index, and limiting duration to no more than one year longer than that benchmark.”
AGGY garners a Bronze rating from Morningstar.
For more information on the fixed-income market, visit our bond ETFs category.