With the fixed income ETF landscape expanding at a rapid pace and more population growth expected in the coming years, advisors and investors face a dizzying array of choices. Choice is good, but “dizzying" isn’t. Even with that population surge, the bond ETF realm will likely continue soaring in terms of size.
“One reason is that stock ETFs are heavily picked over. Just about every stock strategy has been attempted at this point: broad market indexes, strategic-beta/risk factors, sustainability and values-based strategies, and thematic ETFs, along with active and passive approaches to many of them,” noted Morningstar’s Daniel Sotiroff. “The best stuff is already out there, it’s fairly inexpensive, and it’s difficult to compete with.”
Time will tell what nifty fixed income ideas ETF issuers next unveil. For market participants prizing dependability and familiarity, the WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (AGGY ) remains a compelling choice.
AGGY Still Relevant
The $821 million AGGY turns 11 years old in July, confirming it’s been around for a variety of interest rate environments. That’s something to keep in mind, as it’s nearly a foregone conclusion President Trump will replace Federal Reserve Chair Jerome Powell this year with someone more apt to consistently lower interest rates.
Changes at the central bank and expectations of more accommodative monetary policy are among the reasons more advisors are evaluating fixed income ETFs. However, advisors know that as interest rates decline, bond yields usually do the same. Those declining yields could highlight AGGY’s advantages. After all, as the ETF’s name confirms, it’s a yield-enhancing alternative to basic aggregate bond funds.
“Another reason is the yields attached to bond ETFs,” added Sotiroff. “Many had historically low yields throughout most of the 2010s, when the Federal Reserve’s short-term interest rate hovered around 0. Yields serve as a rough proxy for a bond ETF’s expected return. So, low yields translated into low returns that couldn’t compete with a persistently appreciating stock market.”
Corporates Enhance the Bond ETF
Attribute AGGY’s yield enhancements largely to a 44.11% weight to corporate bonds. That well exceeds the weighting found in Treasury-dependent competing ETFs. Bottom line: AGGY could allure at a time when corporate default rates are low and as fixed income investors look for “spicier” bond ETF choices.
“More choices can be a good thing, but don’t forget the role that bonds play in a portfolio. In most instances, they’re used to manage risk. Done well, they deliver reasonably low volatility and effectively diversify away stock market risk,” concluded Sotiroff.
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