Why Bond Investors Should Consider Factor-Based ETFs

“Many fixed income benchmarks weight by market cap and, as a result, may be allocating more weight to companies issuing more and more debt – a strategy that may seem counterintuitive,” Farris said. “The solution is to identify themes that have the potential to offer superior risk-adjusted returns or a more nuanced exposure to meet client needs.”

For example, Nushares fixed-income ETFs like the NuShares Enhanced Yield 1-5 Year U.S. Aggregate Bond ETF (NYSEArac: NUSA) may help fixed-income investors take an alternative approach to bond investing. The smart beta ETF focuses on factors like carry or the tendency for higher-yielding assets to provide higher returns, volatility or the tendency for lower-risk higher-quality assets to generate higher risk-adjusted returns, value or the tendency for relatively cheap assets to outperform, and momentum or the tendency for recent relative performance to continue in the near future.

The resulting portfolio overweights investment-grade BBB-rated debt, along with corporate and securitized credit, as compared to the broad U.S. investment-grade fixed-income market. Additionally, the factor-based bond ETF underweights U.S. Treasuries.

Robby Flink, Advisor for Infinity Financial Group, argued that investors and advisors could look to something like the NUSA as an alternative to the traditional Bloomberg Barclays U.S. Aggregate Bond Index as the smart beta ETF diminishes rate risk without a significant change to credit quality and yield.

Financial advisors who are interested in learning more about factor-based bond investments can watch the webcast here on demand.