Introducing Factors to Fixed Income ETFs

Each bond is ranked according to its marginal contribution to risk, or MCR, a measurement of the amount of risk a security contributes to a portfolio of securities. The measure is calculated using a bond’s duration and the difference between the bond’s spread and a weighted average spread of the bonds in the broader index universe. Those with a higher MCR will add more credit risk than debt with a lower MCR. The underlying index will then only select the 50% of bonds measured to have the least credit risk based on their MCR.

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.

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 appellation 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.

Financial advisors who are interested in factor-based fixed-income strategies can register for the Tuesday, March 28 webcast here.