A Strong Start for Smart Beta Bond ETFs

AGGE and AGGP incorporate momentum factors to direct investors toward strengthening fixed-income segments in an attempt to enhance returns. Both ETFs adhere to a momentum investing strategy where momentum is measured by comparing a short-horizon, 45-day moving average of returns to longer-horizon, 90-day moving average of returns while taking into account recent volatility in each sector. Moreover, the underlying indices weigh each of the fixed-income sectors based on the total return momentum of each sector.

“Momentum-style investing can be applied to fixed income through a dynamic sector allocation strategy using major sector building blocks of the Barclays Agg Index,” according to an IndexIQ research note. “Using a volatility-adjusted crossover signal for the momentum score calculation allows the strategy to compare different sectors on the same basis and avoid fake signals from erratic short-term moves.”

The momentum bond investment strategy may help enhance returns. IndexIQ research has revealed that over the period between January 2004 to July 2016, the momentum strategy outperformed the Barclays AGG Index by an average of 109 basis points per year while the momentum plus strategy outperformed the AGG by 141 basis points per year.

AGGE will act as a core bond position, providing exposure to U.S. Treasuries, U.S. investment grade corporate bonds and U.S. investment grade mortgage-backed securities. On the other hand, AGGP, like its name suggests, provides access to core positions similar to AGGE “plus” up to 25% in U.S. high yield debt and up to 5% in U.S. dollar denominated debt of emerging market issuers.

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