Investors who want core bond exposure with yield are essentially asking for their cake and eating it too, especially given the current low-yield environment where the 10-year Treasury note keeps on making new record lows. Nonetheless, there are some options out there and one fund to take a look at is the WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (NYSEArca: AGGY).
AGG tracks the Bloomberg Barclays U.S. Aggregate Bond Index, which traces its roots back to the 70s—bell bottoms, disco music and all.
“When considering options for a core bond fund, it is important to remember that for most investors the primary purpose of a bond position within a portfolio is to diversify equity risk. When the equity market is in turmoil, bonds can serve as ballast,” wrote Neal Kosciulek, a manager research analyst, passive funds research, for Morningstar. “With its origins dating back to the early 1970s, the Bloomberg Barclays U.S. Aggregate Bond Index is synonymous with core bond market exposure.”
“The index is primarily comprised of U.S. Treasury bonds, U.S. Agency bonds, and investment grade U.S. corporate bonds,” Kosciulek added. “The index weights bonds by their market value. Market-value weighting free-rides off the collective wisdom of market participants to set bond prices. That said, it also means that issuance activity dictates the makeup of the benchmark. For example, the Bloomberg Barclays U.S. Aggregate Bond Index is more conservative now than it was before the financial crisis. This shift was driven by a surge in new issuance of U.S. Treasuries. Prior to the crisis, Treasury bonds represented just 20% of the total market-value weighted index. Today, they represent 40% of its value.”
Given this, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) has been the go-to fund for investors who want that core bond exposure since 2003. With the AGGY, investors still get the core elements of AGG, but with a twist of yield.
As mentioned, 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.
Benefits of using AGGY:
- Seeks to enhance income potential by sourcing opportunities within the Bloomberg Barclays U.S. Aggregate Bond Index
- A rules-based approach re-weights the subcomponents of the Bloomberg Barclays U.S. Aggregate Bond Index to enhance yield, while broadly maintaining familiar risk characteristics
- Use as a core fixed income allocation
For more information on AGGY and other ETFs, visit the WisdomTree site.