Smart Beta ETF Methodologies Could Be Effective for Bonds, Too

Many fixed-income investors widely track the Bloomberg Barclays U.S. Aggregate Bond Index, but tracking the so-called Agg may open investors to certain risks.

Alternatively, there is a growing group of smart beta bond ETFs that could limit potential risks and help generate enhanced returns.

“If you look at how the Agg evolved over time, it is much different than it was – look at the debt issues of the U.S. government has increased its weight of U.S. treasuries in the Agg, which people may not be aware of,” Salvatore Bruno, Managing Director and Chief Investment Officer with IndexIQ, said at the recent Morningstar ETF Conference. “We think it is important to think about what is exactly in your fixed income and realize that not one-size fits all.”

Different investors have varying levels of risk tolerance. Consequently, one fixed-income investor may be more risk tolerant and favor more credit exposure and higher yields, whereas a more conservative investor would lean toward the safety of highly rated government debt.