As the Federal Reserve continues to normalize its monetary policy and hike interest rates, fixed-income ETF investors will need to take a harder look at their portfolios.
“That’s a real concern for advisors that have a core fixed-income position, particularly those benchmarked to the ‘Agg,'” Martin Kremenstein, Head of Retirement Products and ETFs at Nuveen, said at the Charles Schwab IMPACT 2018 conference, referring to the widely observed Bloomberg Barclays U.S. Aggregate Bond Index or so-called Agg for short.
“The Agg is obviously one of the bellwether, investment-grade indexes out there. However, it has really changed – you know – over the last 10, 15 years. Less credit exposure; much more government exposure; much more duration than then – duration is six years now. That’s a lot of exposure to rates and a rising rates environment,” he added.
Alternatively, fixed-income investors can look to smart beta ETF strategies for a smarter way to access the bond market. Specifically, investors may consider something like the NuShares Enhanced Yield U.S. Aggregate Bond ETF (NYSEArca: NUAG).
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.
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.
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