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A New Way Of Viewing An Old Bond Index

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A New Way Of Viewing An Old Bond Index

The Barclays U.S. Aggregate Bond Index is one of the most widely followed fixed income indexes in the world, and some of the largest fixed income exchange-traded funds offer exposure to this benchmark in pure form.

However, that does not mean the Barclays US Aggregate Bond Index cannot be improved upon with some adjustments. In an effort to meet investors' desire for increased income and yield without adding significant credit risk to the equation, some ETF issuers are reconfiguring the Barclays U.S. Aggregate Bond Index, or the “Agg” as it is also known.

Getting To Know AGGY

The WisdomTree Trust WisdomTree Barclays U.S. Aggregate Bond Enhanced Yield Fund (NYSE: AGGY) is one of the most successful members of a newer wave of ETFs attempting to alter the Agg. Just over a year old, AGGY is home to more than $93 million in assets under management.

Related Link: Investors Just Can't Get Enough Of Bond ETFs

AGGY attempts to beat the Agg by re-weighting that benchmark's holdings, meaning the WisdomTree offering is far from being another standard Agg-tracking fund.

AGGY “divides the benchmark into 20 subcomponents based on maturity (short, medium, and long term), credit quality, and sector (government, corporate, and securitized). Each month it reweights the subcomponents to maximize yield, subject to a few constraints,” said Morningstar in a recent note.

Looking At Agg Through AGGY

Although AGGY offers a different way of viewing the Agg, that does not mean investors are subjected to lower credit quality. The Agg is an investment-grade index and AGGY reflects as much nearly 86 percent of the ETF's holdings are rated AAA or A. AGGY actually caps exposure to lower-rated debt.

AGGY's effective duration is 6.84 years with a 30-day SEC yield of almost 2.3 percent. WisdomTree also limits by how much AGGY's duration can exceed that of the Agg.

“The end result is a modest pickup in yield relative to the Aggregate Index, greater exposure to lower-quality (A and Baa rated) debt, and slightly greater interest-rate risk. Overall, this fund is a compelling option for investors who want a little more return and are willing to take a little extra risk to get it — especially as it charges a very attractive 0.12 percent expense ratio,” added Morningstar.

Another result is effectiveness. Over the past year, AGGY has topped the Agg by about 90 basis points.

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