Fixed income investors, particularly those allocated to aggregate bond funds, are likely frustrated the Federal Reserve has yet to oblige them with a 2025 interest rate cut. Following a disappointing July jobs report and substantial downward revisions of prior months’ data, the central bank may have no choice but to lower borrowing costs next month.
Even without that assistance, the Bloomberg Aggregate Bond Index has delivered a solid 4.5% YTD return. The WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (AGGY) has matched that showing. Simply moving in lockstep with basic rivals may not endear AGGY to investors. But those market participants should remember fixed income investing is a long-term proposition. And over longer holding periods, AGGY shines.
The ETF turned 10 years old last month. It beat the “Agg” by 180 basis points for three years ending Aug. 8. Since inception, AGGY sports a notable advantage over the basic aggregate bond index. It also does so over the two largest broad-based fixed income ETFs.
AGGY Has Near-Term Allure, Long-Term Potential
One reason for advisors and investors to consider ETFs such as AGGY over the near term is that while these products have generated solid YTD returns, some market participants may not be convinced now is the time to embrace aggregate bonds funds due to the unusual amount of anti-Fed vitriol coming from the White House.
“I think investors in the market, not just in the market in the US, but in the market in kind of global markets, see the Fed as a voice of reason and really put a lot of trust in the Fed to do the right thing when it comes to monetary policy,” noted Morningstar fixed income analyst Paul Olmsted. “And if that is somehow disrupted, I think that could certainly undermine what the Fed is doing and the world can lose confidence in that. So, that would ultimately lead to higher volatility.”
Starting Yields Somewhat High vs. Historical Norms
Additionally, starting yields remain somewhat high relative to historical norms. For its part, AGGY sports a 30-day SEC yield of 4.59%. That’s not astronomically high. Yet the higher a bond’s yield is when an investor gets involved, the shorter the odds are of success.
“The markets have not seen long-term Treasury yields this high since before the 2008 financial crisis. Despite lingering fears from the bond market carnage in 2022, investors today should take advantage of elevated bond yields, says Olmsted,” said Morningstar’s Ivanna Hampton.
Three metrics add to the allure of AGGY. Those are its status as intermediate-term fund, its credibility as a portfolio diversifier. and a high-quality roster that could be a buffer amid Trump/Fed volatility.
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