Many investors are acquainted with factor-based strategies in the equity space, but now there is a nascent expansion of smart-beta exchange traded funds to potentially help enhance returns and reduce volatility in the fixed-income segment.
On the upcoming webcast, Introducing Factors to Fixed Income ETFs, Salvatore Bruno, Chief Investment Officer and Managing Director of IndexIQ, and James “J.R.” Rieger, Head of Fixed Income Indices at S&P Dow Jones Indices, will explore the changing fixed-income environment and introduce factors that may potentially improve risk-adjusted returns in a bond portfolio.
For example, IndexIQ has recently added a number of ETFs for a smarter core bond portfolio allocation, including the IQ S&P High Yield Low Volatility Bond ETF (NYSEArca: HYLV), IQ Enhanced Core Bond U.S. ETF (NYSEArca: AGGE) and IQ Enhanced Core Plus Bond U.S. ETF (NYSEArca: AGGP).
HYLV is a rules-based, fixed income ETF that specifically tries to target lower volatility exposure in high yield debt. The ETF seeks to capture a large portion of the attractive yield offered by high yield bonds, while reducing the volatility with the riskiest credits.
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.