A Different Spin On The Traditional Bond ETF

The Barclays U.S. Aggregate Index is one of the most widely followed fixed income benchmarks and some well-known exchange traded funds offer exposure to that index. Other ETFs offer different, more unique spins on the more traditional Barclays U.S. Aggregate Index.

One of those ETFs is the WisdomTree Barclays U.S. Aggregate Bond Enhanced Yield Fund AGGY, which follows the Barclays U.S. Aggregate Enhanced Yield Index. These days, high yield can imply high risk when it comes to bond ETFs, but that is not the case with the WisdomTree Barclays U.S. Aggregate Bond Enhanced Yield Fund as its 30-day SEC of 2.88 percent is high enough to be a cause for alarm.

One way of looking at AGGY is as a yield enhancement vehicle.

“In order to enhance the Agg’s income potential, the enhanced strategy starts with the same investable universe as the Agg but then seeks to reweight the exposures in order to increase yield. By applying sector, credit quality and duration constraints to this process, the strategy has been able to broadly retain the risk characteristics of the Agg, but with 86 basis points (bps) of higher income potential.2 Put another way, the investment’s income potential is boosted by over 30%. This is generally achieved by decreasing exposure to U.S. Treasuries and increasing exposure to credit (corporate and mortgage backed securities),” said WisdomTree in a recent note. 

AGGY mixes Treaurys, U.S. government agency debt and corporate bonds and the ETF's credit profile is well-suited for conservative investors. The ETF allocates about 92 percent of its combined weight to bonds rated AA, BBB or A.

AGGY has an effective duration of 6.54 years and an average yield to maturity of nearly 3.1 percent, according to WisdomTree data. 

“Ultimately, investors will continue to demand fixed income in order to generate income and help mitigate the volatility of their equity investments. In our view, while many see the Agg as the barometer of their bond portfolio, we believe that the investment approach and rationale can be enhanced. By decreasing allocations to U.S. Treasuries and overweighting exposure to investment-grade securities, investors can potentially boost the income potential and total return profile of their fixed income portfolio,” adds WisdomTree.