Improving Broad Bond Market Exposure

Many of the most widely followed fixed income benchmarks -- including the Bloomberg Barclays US Aggregate Bond Index -- and the related exchange traded funds weight holdings by market capitalization.

That methodology can leave investors yearning for more diversification across multiple corners of the bond market, while also keeping investors looking for more yield.

What To Know

The WisdomTree Yield Enhanced U.S. Aggregate Bond Fund AGGY is one of the premier options for investors looking for alternative to traditional aggregate bond funds. AGGY favors fundamental weighting over weighting its holdings by issue size and market capitalization.

AGGY “is a strategic-beta fund that strives to boost return by overweighting higher-yielding components of the Aggregate Index,” said Morningstar in a recent research note. “This fund doesn’t take outsize risk, and it could serve as inexpensive core bond holding.”

AGGY's rules-based methodology “re-weights the subcomponents of the Bloomberg Barclays U.S. Aggregate Bond Index to enhance yield, while broadly maintaining familiar risk characteristics,” according to WisdomTree.

Why It's Important

AGGY, which has over $388 million in assets under management, allocates 46.57 percent of its weight to corporate bonds. That's a larger allocation to corporates than is found on the Bloomberg Barclays US Aggregate Bond Index.

“Each month, the fund reweights these subsectors to maximize the portfolio’s yield under a set of constraints to limit turnover, preserve diversification, and limit risk,” said Morningstar. “For example, most of the fund’s subsector weightings stay within 10% of the Aggregate Index, and it caps monthly tracking error against its parent index.”

While AGGY's weighting scheme is a departure from standard aggregate fixed income benchmarks, the fund doesn't subject investors to significant credit risk. Nearly 70 percent of AGGY's holdings are rated AAA, AA or A.

What's Next

Past performance is never a guarantee of future returns, but since coming to market more than three years ago, AGGY has done an admirable job of being a credible alternative to cap-weighted bond benchmarks.

“From its inception in July 2015 through November 2018, its return topped the category average by 0.27% annually, albeit with greater risk,” said Morningstar. “The fund’s tilt toward corporate bonds contributed the most to its outperformance.”

The research firm has a Bronze rating on AGGY.

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