As fixed-income investors consider ways to diversify their portfolios, many are looking to smart beta bond ETFs to potentially enhance returns and diminish downside risks.
“What we are trying to do is really marry our product innovation with New York Life’s experience in income and equity investing, and really provide investors with the solutions that passive vehicles can not achieve,” Kelly Ye, Director for Research for IndexIQ, said at the 2018 Morningstar Investment Conference.
For example, while bond investors may still need a stable source of income-generating ideas, investors will have to look out for a rising interest rate environment and consider the risks in a prolonged bull market environment.
Consequently, investors may turn to alternative fixed-income ideas. IndexIQ has a handful of smart beta bond ETF options for investors to choose from, including IQ S&P High Yield Low Volatility Bond ETF (NYSEArca: HYLV), a rules-based fixed income ETF that specifically tries to target lower volatility exposure in high yield debt, along with the IQ Enhanced Core Bond U.S. ETF (NYSEArca: AGGE) and IQ Enhanced Core Plus Bond U.S. ETF (NYSEArca: AGGP), which incorporate momentum factors to direct investors toward strengthening fixed-income segments in an attempt to enhance returns.
AGGE and AGGP’s momentum following strategy may allow investors to following a trend following style that has resulted in overperformance in the long-term as opposed to a contrarian investor betting on a reversal of recent trends. Meanwhile, HYLV could help investors gain exposure to high-yield debt securities while limiting risk exposure associated with speculative-grade debt securities.
Traditional “passive investments are no longer delivering the best bang for the buck. Take the ‘Agg’ for example, the duration has doubled from three to six years and income halved from six to three percent. Clearly, investors need better tools for fixed-income,” Ye added, referring to the greater interest rate risk from an longer duration and lower yields in the benchmark Bloomberg Barclays U.S. Aggregate Bond Index, which exposes many passive fixed-income investors to greater risks in an extended bond market bull run.
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