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Rethinking Global Fixed Income Strategies

December 14, 2018 8:59 am
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Rethinking Global Fixed Income Strategies

Global fixed income exchange traded funds, like many of their domestic counterparts, are frequently weighted by market capitalization.

WisdomTree Investments Inc. (NASDAQ:WETF) features an expansive lineup of ETFs, including bond funds, that favor alternative weighting methodologies. The newest addition to the firm's stable of smart beta bond offerings is the WisdomTree Yield Enhanced Global Aggregate Bond Fund (NYSE:GLBY).

What Happened

The WisdomTree Yield Enhanced Global Aggregate Bond Fund debuted earlier this month. GLBY tracks the Bloomberg Barclays Global Aggregate Enhanced Yield Index. The new ETF follows a similar methodology as the WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (NYSE:AGGY). AGGY debuted almost three and a half years ago and has nearly $388 million in assets under management.

One of the cornerstones of AGGY is yield enhance relative to traditional bond benchmarks without subjecting investors to significantly higher levels of risk. GLBY looks to add to that tradition.

“In global markets, the opportunities for yield enhancement can be even greater since you have another lever to pull via additional countries and currencies,” said WisdomTree in a recent note. “However, given that many developed markets have lower interest rates than the U.S., won’t investing globally dampen income? In short, we believe the answer is no.”

Why It's Important

GLBY has 75 holdings with AGGY being the new ETF's largest component at a weight of over 64 percent. As a result, the U.S. is by far the largest weight among GLBY's more than 30 geographic exposures. U.K. and German bonds combine for nearly 15 percent of the new ETF's geographic weight.

GLBY also offers an attractive hedge of global bonds into U.S. dollars.

“By hedging global bonds to U.S. dollars, there is typically an attractive yield pickup due to the significant difference between developed short rates,” said WisdomTree. “This also can significantly reduce the volatility of international investing for U.S.-based investors.”

Although over 42 percent of GLBY's holdings are corporate bonds, the new ETF's credit risk is relatively low as 51 percent of the fund's holdings are rated AAA or AA. GLBY's effective duration is 7.54 years.

What's Next

“Through our approach to the Global Agg, when a variety of constraints focused on risk management were applied, the output of the index methodology resulted in a portfolio with an additional 69 basis points (bps) of income potential that retained a similar interest rate risk profile to that of the Global Agg,” according to WisdomTree

GLBY's annual fee is 0.20 percent, or $20 on a $10,000 investment.

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