A shifting fixed-income environment now exposes traditional passive bond investors to new risks, especially in a low interest rate environment.
On the upcoming webcast, Building Income-Focused Client Portfolios with ETFs, Jordan Farris, Managing Director, Head of ETF Product Development, Nuveen; and Briton Ryan, Managing Director, Head of Capital Markets, Nuveen, will outline the risks passive index-based investors face today and look to factor-based bond strategies that could enhance yields and limit downside risks.
For example, the NuShares Enhanced Yield 1-5 Year U.S. Aggregate Bond ETF (NYSEArac: NUSA) and the NuShares Enhanced Yield U.S. Aggregate Bond ETF (NYSEArca: NUAG) may help fixed-income investors take an alternative approach to bond investing.
The NuShares Enhanced Yield 1-5 Year U.S. Aggregate Bond ETF tries to reflect the performance of the BofA Merrill Lynch Enhanced Yield 1-5 Year US Broad Bond Index, which is represented by a modified version of the more widely observed BofA Merrill Lynch 1-5 Year US Broad Market Index.
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.
Similarly, NUAG seeks to offer enhanced yield relative to the broad, investment-grade fixed income market with comparable risk and credit quality by reflecting the BofA Merrill Lynch Enhanced Yield US Broad Bond Index (Enhanced Index), which is designed to broadly capture the U.S investment grade fixed income market.
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.
There is also an option for fixed-income investors who are interested in socially responsible investments. For example, the Nuveen ESG U.S. Aggregate Bond ETF (NYSEArca: NUBD) helps fixed-income investors pair their bond investment needs with environmental, social and governance, or ESG, principles.
At Nuveen, the money manager employs a number of other ESG criteria to better target companies that exhibit socially responsible characteristics. For example, Nuveen employs an ESG rating to capture an issuer’s performance on key ESG risks relative to peers, a controversy score that captures an issuer’s exposure and response to event-driven controversies, a controversial business investment component that captures an issuer’s activity in industries that may cause significant social harm, and a low-carbon criteria that captures the carbon intensity of an issuer based on involvement in certain industries.
Financial advisors who are interested in learning more about fixed-income strategies can register for the Thursday, October 3 webcast here.