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Inside the New Short-Duration Bond ETF With Momentum Strategy

Sanghamitra Saha
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Innovations have expedited in the fixed income ETF world primarily to cope with the rising rate environment. As the Fed has been hiking key interest rates at regular intervals, interest rates are on an uptrend this year and are likely to remain high in the days to come.

Since rising yields and bond prices are negatively correlated, plain vanilla bond ETFs are likely to slump in the current scenario. So, issuers are increasingly coming up with factor-based or smart-beta bond ETFs to cater to investors’ needs.

IndexIQ, a New York Life Investments Company, is one such issuer. The company previously launched products likeIQ Enhanced Core Bond U.S. ETF AGGE and IQ Enhanced Core Plus Bond U.S. ETF AGGP in May 2016, and IQ S&P High Yield Low Volatility Bond ETF HYLV, the first high yield low volatility fixed income ETF, in Feb 2017 (see all Total Bond Market ETFs here).

To strengthen the lineup, the firm has no come up with IQ Short Duration Enhanced Core Bond U.S. ETF SDAG. This is an ETF of ETFs and targets momentum investing in the bond market.

Inside SDAG

The fund looks to outperform the short-duration U.S. fixed-income universe by using a momentum investing strategy. Momentum is measured by comparing a short-horizon (45-day) moving average of returns to a longer-horizon (90-day) moving average of returns, per the issuer.

The strategy is fulfilled by tracking the IQ Short Duration Enhanced Core Bond U.S. Index. The product invests in short-term U.S. Treasuries and U.S. investment-grade corporate bonds through ETPs and can allocate up to 25% in short-term U.S. investment-grade, floating rate bonds and short-term U.S. high yield debt.

There are total eight holdings in the fund, of which Vanguard Short-Term Corporate Bond ETF takes about 35.39% of the portfolio, followed by 18.09% invested in iShares Floating-Rate Bond ETF, 12.5% in SPDR Bloomberg Barclays Short-Term, High-Yield Bond ETF and 12.4% in iShares 0-5 Year High-Yield Corporate Bond ETF. The fund charges 36 bps in fees.

How Does It Fit in a Portfolio?

The fund is short-duration in nature. In a rising rate environment, short-duration bonds suit investors more as these are less sensitive to interest rates. Investors’ need for solid current income is also satisfied as SDAG has about 25% focus on high-yield products.

Not only these, the fund targets the floating rate bonds too, which are one of the best tools to navigate a rising rate era. These are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared with traditional bonds (read: Hedge Rising Rates with Floating Rate ETFs).

Competition

There are plenty of short-term bond ETFs in the market, namely Vanguard Short-Term Corporate Bond ETF VCSH, iShares Floating Rate Bond ETF FLOT and iShares Short-Term Corporate Bond ETF IGSB, but these should not come in the way of SDAG. The newly launched fund is pretty innovative and smart by concept and employs many unique strategies unlike the space biggies. So, SDAG should see its share of success in the coming days.

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