Deconstruct the Bond Index with ETFs

The  iShares Core US Aggregate Bond ETF (NYSEArca: AGG), which tracks the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index, can give bond investors general exposure to the fixed income markets, but there are times when current market conditions warrant a deconstruction of the AGG to extract maximum investor benefit.

The deconstruction of the AGG refers to an investment strategy in which an investor corners a specific portion of the bond market sectors–Government debt via Treasuries, agencies, credit, mortgage-backed securities (MBS), commercial mortgage-backed securities (CMBS), and asset-backed securities (ABS). It would be akin to a real estate investor focusing on only one portion of a residential investment property, such as the kitchen after upgrades are planned or the backyard prior to installing a pool.

Relative to the fixed income market, deconstructing the AGG will allow exposure to sectors where markets are higher yielding, sometimes in lieu of accepting more risks. Market experts, such as Jordan Farris, Managing Director of ETF Product Development at Nuveen, view the deconstruction of the AGG as a viable investment strategy.

Nuveen offers investment solutions in fixed income ETFs, such as its NuShares Enhanced Yield US Aggt Bd ETF (NYSEArca: NUAG) that tracks the the ICE BofAML Enhanced Yield US Broad Bond Index.

“Investors are in need of income and the majority of traditional aggregate bond indices weight by issuance as opposed to something more aligned with client objectives,” said Farris. “In the case of NUAG, we track an index that weights the underlying index constituents by yield within a set of predetermined risk parameters.”

Related: The Fed Needs to Focus on the Treasury Yield Curve

While its difficult to mitigate risk in all types of market scenarios, deconstructing the AGG could serve has hedge plays in the market stemming from short-term interest rate changes.