Have you checked on your fixed income allocation lately? It’s one thing to buy an ETF tracking the Bloomberg US Aggregate Index, (BBUSATR), or the AGG. It’s another to know what’s in it. Crafting an appropriate fixed income allocation to meet one’s overall portfolio goals requires a more active approach than buying and holding. The corporate bond ETF KORP could present a strong option to deal with the AGG’s corporate underweight, positioning investors ahead of 2025.
See more: Is Now the Time to Switch to Active Core Fixed Income?
The American Century Diversified Corporate Bond ETF (KORP ), actively invests in U.S. corporate debt in an effort to generate income. Charging a 29 basis point fee, the fund looks to produce a duration of five to seven years. Specifically, the strategy targets BBB-rated borrowers, towards the lower end of the investment-grade category. What’s more, the corporate bond ETF also invests in even riskier, junk-rated debt securities.
That could see KORP providing a bit more juice than the AGG can. For all of its benefits, the AGG may rely too much on Treasuries and mortgage-backed securities, losing out on some higher returns from those riskier debt offerings. Consider, for example, the iShares Core U.S. Aggregate Bond ETF (AGG ). AGG tracks the Bloomberg US Aggregate Index, itself. AGG has just an 11% weight to corporates. Sovereign debt and MBS offerings together constitute more than two thirds of its portfolio. That has helped the AGG produced a 4.5% 30-day SEC yield as of December 16.
That, of course, pales in comparison to KORP’s more than 90% weight to corporate debt. That has helped KORP produce a 5.1% 30-day SEC yield as of November 29, per American Century Investments data.
How, then, might investors build a portfolio appreciating that contrast? Relying on both funds could create a more diversified fixed income structure. Alternatively, using funds like KORP as building blocks to get each flavor in the AGG weighted to an investor’s preference could also help. Looking to next year, an active fixed income approach in an area like corporates could appeal, as economic conditions steadily improve and live rates drive opportunities in debt.
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