While some may be put off by the slightly higher duration and greater exposure to credit, WisdomTree argued that the strategy has maintained a yield advantage. Furthermore, the methodology as not relient on falling rates to generate excess returns versus the benchmark Barclays Aggregate Bond Index.
AGGY may bank on a strengthening economy as a stronger market will help support corporate credit.
“In our view, one of the primary takeaways that investors overlook in our Enhanced Yield Index is the concept of diversification. While our approach is generally over-weight interest rate risk versus the benchmark, it is also generally over-weight credit risk. With few exceptions, periods of rising rates generally coincide with faster economic growth, increases in inflation expectations and a healthier U.S. economy. As a result, credit spreads tend to tighten as the risk of ratings downgrades recedes,” the WisdomTree strategists said.
Additionally, a rising yield period does not automatically mean a bond strategy will underperform. Over the past seven quarters, a period in when 10-Year Treasury yields rose by more than 140 basis points, the yield-enhanced Index outperformed the widely observed Agg by 80 basis points annualized.
“Bottom Line: A credit over-weight resulted in higher income and the ability to benefit from tighter spreads despite the headwinds of increased duration during a rising rate environment,” according to WisdomTree.
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