Most fixed income benchmarks, including global indices, are cap-weighted, but that strategy can leave investors yearning for more income and yield. A new global bond exchange traded fund looks to address those issues.
The WisdomTree Yield Enhanced Global Aggregate Bond Fund (NYSEARCA: GLBY) debuted earlier this month. GLBY can be seen as the global alternative to the well-known WisdomTree Barclays U.S. Aggregate Bond Enhanced Yield Fund (NYSEArca: AGGY). The new GLBY tracks the Bloomberg Barclays Global Aggregate Enhanced Yield Index.
“In global markets, the opportunities for yield enhancement can be even greater since you have another lever to pull via additional countries and currencies,” said WisdomTree in a recent note. “However, given that many developed markets have lower interest rates than the U.S., won’t investing globally dampen income? In short, we believe the answer is no. By hedging global bonds to U.S. dollars, there is typically an attractive yield pickup due to the significant difference between developed short rates. This also can significantly reduce the volatility of international investing for U.S.-based investors.”
GLBY ETF Details
GLBY’s largest holding is the aforementioned AGGY at a weight of over 64% so while the new ETF offers exposure to over 30 countries, the U.S. is by far GLBY’s largest geographic exposure.
While GLBY allocates over 42% of its weight to corporate bonds, its credit quality is stellar as bonds rated AAA or AA combine for 49% of the new fund’s weight.
GLBY “employs a systematic, rules-based approach to enhance yield not only at the country level, but also at the global level, by taking advantage of opportunities between currencies,” according to WisdomTree. “The construction process also maintains a disciplined risk management process through currency hedging, tracking error constraints and sector and interest rate caps to broadly maintain the risk characteristics associated with a globally diversified portfolio.”
GLBY’s effective duration is 7.54 years, but investors are compensated for the potential interest rate risk with added yield potential.
“Through our approach to the Global Agg, when a variety of constraints focused on risk management were applied, the output of the index methodology resulted in a portfolio with an additional 69 basis points (bps) of income potential that retained a similar interest rate risk profile to that of the Global Agg,” according to WisdomTree.
For more on smart beta ETFs, visit our Smart Beta Channel.