The Federal Reserve is on a bond-buying binge, gobbling nearly everything from Treasuries to mortgage-backed securities to municipal debt to investment-grade and even junk corporate debt.

In a fixed income environment that’s anything but normal, investors may want to consider alternatives to traditional bond benchmarks, including the WisdomTree Barclays U.S. Aggregate Bond Enhanced Yield Fund (NYSEArca: AGGY).

AGGY uses a“rules-based approach and re-weights the subcomponents of the Bloomberg Barclays U.S. Aggregate Bond Index to enhance yield, while broadly maintaining familiar risk characteristics. AGGY tries to boost return by reweighting the components of the Aggregate Index. But this additional yield is not free as it comes with greater credit risk and rate risk,” according to WisdomTree.

The Bloomberg Barclays U.S. Aggregate Index is one of the most widely followed bond benchmarks in the world and home to more than 7,700 bonds, it implies some level of diversity. However, upon closer examination, the “agg” is heavily allocated to the U.S. government.

While that limits credit risk, it also limits investors’ income-generating potential. Yield has been hard to come by as of late and with more yield comes the prospect of taking on more risk via duration.

AGGY Angles

AGGY could be useful for fixed income investors because of sky-rocketing deficits, which could reach $3 trillion in the U.S. in the 2021 fiscal year.

“Obviously, the government has to fund this shortfall, so get ready for an explosion in upcoming Treasury supply, consisting of both bills and coupons,” said WisdomTree in a recent note. “In fact, it has already begun. Since a good portion of the relief package is designed for as quick an impact as possible, the clear path for the Treasury is to ratchet up its t-bill issuance.”

AGGY seeks to track the price and yield performance, before fees and expenses, of the Bloomberg Barclays U.S. Aggregate Enhanced Yield Index (the “index”). The index is designed to broadly capture the U.S. investment grade, fixed income securities market while seeking to enhance yield within desired risk parameters and constraints.

“Given the expected surge in UST supply, the benchmark Bloomberg Barclays U.S. Aggregate Index (Agg) will most likely see its weighting to Treasuries remain elevated as compared with other investment-grade asset classes, potentially sacrificing yield in this historically low-rate environment,” notes WisdomTree. “The WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (AGGY) uses a rules-based approach to reallocate across subcomponents in the Agg, seeking to enhance yield while maintaining a similar risk profile.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.