Consequently, money managers have come out with alternative indexing methodologies that eschew traditional market cap-weighting to also help fixed-income investors potentially enhance returns and diversify risk, similar to what smart beta ETFs have done for equity investors.
“Looking at how factors worked in the equity world, we tried to port them over to the fixed-income world,” Bruno said. “Momentum is a strategy that has worked well historically not only in equities but also in commodities, currencies and other asset classes. So really just taking that body of research that already existed in equities and trying to apply it to different sectors – say the Agg.”
For instance, 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.
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