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The ‘SHAG’ ETF Gets the Short End of the Duration Stick

This article was originally published on ETFTrends.com.

The default bond play to get broad-based exposure might be the  iShares Core US Aggregate Bond ETF (AGG) , but for short duration exposure, the WisdomTree Yield Enhanced U.S. Short-Term Aggregate Bond Fund (SHAG) is the choice.

SHAG seeks to track the price and yield performance of the Bloomberg Barclays U.S. Short Aggregate Enhanced Yield Index. The index is designed to broadly capture the short-term U.S. investment grade, fixed income securities market while seeking to enhance yield within desired risk parameters and constraints.

"In today's fixed income markets, the ability for investors to maintain the appropriate balance between risk andreturn remains extremely challenging," noted a WisdomTree information sheet for the SHAG fund. "While stronger economic growth may boost the returns of credit, this could also lead to an increase in nominal interest rates. At the same time, core fixed income benchmarks have experienced a dramatic shift from their historical composition over the last 20 years. Given that many investors often follow market capitalization-weighted benchmarks, their holdings of U.S. Treasuries have increased markedly, often at the cost of their ability to generate sufficient income from core portfolios.

The bond markets threw a curve ball at fixed income investors earlier this year with an inverted yield curve, sending the capital markets overall on another volatile ride–something they may or may not have been accustomed to during the fourth quarter of 2018. The short-term 3-month and longer-term 10-year yield curve inverted–an event that hasn’t been seen since 2007–just ahead of the financial crisis.

The spread between the 3-month and 10-year notes fell below 10 basis points for the first time in over a decade. This strong recession indicator contrasted a more upbeat central bank, but investors were quick to add more caution to their capital allocation--one of those options being short-term duration bonds.

With the first quarter of 2019 in the books, investors are looking at a capital market environment in the U.S. that is standing tall after stumbling in the tail end of 2018. Nonetheless, it’s necessary for investors to remain strategic when it comes to deploying capital in the current market environment.

Why the strategic bent? One only has to look back to the last quarter of 2018 to know the reason why–the Dow Jones Industrial Average fell 5.6 percent, while the S&P 500 was down 6.2 percent and the Nasdaq Composite declined 4 percent.

All in all, 2018 marked the worst year for stocks since 2008 and only the second year the Dow and S&P 500 fell in the past decade. That said, the strategy for 2019 is eponymously as such–getting strategic.

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