ETF Specialist

This Strategic-Beta Bond Fund Pulls From the Active-Manager Playbook

Adam McCullough, CFA

It’s no secret among active bond managers that the conservative nature of the Bloomberg Barclays U.S. Aggregate Bond Index makes it an easy benchmark to top. More than 70% of the index is invested in AAA rated bonds. Many actively managed bond funds outperform the Aggregate Index by taking on more risk.  WisdomTree Yield Enhanced U.S. Aggregate Bond ETF (AGGY) is a strategic-beta fund that strives to boost return by overweighting higher-yielding components of the Aggregate Index. This fund doesn’t take outsize risk, and it could serve as inexpensive core bond holding. The fund’s low fee and reasonable investment process support its Morningstar Analyst Rating of Bronze.

The fund tracks the Bloomberg Barclays U.S. Aggregate Enhanced Yield Index, which divides the investment-grade-focused Aggregate Index into 20 subcomponents. The index defines these subcomponents by sector (securitized, corporate credit, and government), years to maturity, and credit rating. 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. 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.

Adam McCullough, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.