While interest rate cut expectations have seemingly been all over the map this year, there’s emerging consensus that clarity will soon avail itself if/when the Federal Reserve lowers interest rates in September. Thus, there’s also emerging sentiment that now is the appropriate time for investors to consider revisiting bonds or increasing established fixed income exposure.
Of course, it pays to be selective with fixed income exchange traded funds, even when rates are poised to fall. With that in mind, discerning bond investors may want to evaluate the WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (AGGY). Think of AGGY as an income enhancer relative to funds that track the Bloomberg U.S. Aggregate Bond Index.
Typically, more income with bonds implies either more rate risk or credit risk. AGGY’s duration of 6.39 years is long enough to derive some benefit from rate cuts. The ETF’s high-quality portfolio, coupled with a 30-day SEC yield of 4.52%, could prove attractive to even the most conservative, risk-averse fixed income investors.
AGGY Merits Near-Term Consideration
Bonds are typically viewed as long-term holds for investors, and that’s the appropriate way to view AGGY. That said, some historical trends indicate the WisdomTree ETF could be worthy of investors’ immediate consideration.
“Investors experienced positive performance from most fixed income sectors after the first cut. Interestingly, the bulk of these returns was concentrated – roughly 80% for the Bloomberg U.S. Aggregate index, for example – in the first six months after that cut,” notes J.P. Morgan Asset Management (JPAM).
In the essence of preparation, it’s likely better for investors to be engaged with an ETF like AGGY before the Fed lowers rates rather than buying those funds in response to that news.
Second, AGGY could be a viable alternative for investors who have been stockpiling cash in CDs and money markets, enjoying the benefits of high interest rates and low risk along the way. With interest rates poised to fall, risk enters the cash equation. To that end, money market investors may want to consider moving some of their cash into ETFs such as AGGY.
“Cash can feel like a safe haven in the face of market volatility. However, history shows that cash underperforms other fixed income instruments once the rate cutting cycle begins,” adds JPAM. “In fact, in the last six cutting cycles, cash returned on average 2.9% in the six months post-cut, compared to 6.0% from U.S. investment-grade debt. That said, upcoming rate cuts will likely be gradual and data-dependent. This should support an allocation to short-to-intermediate duration bonds.”
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