Smart beta is making its way to fixed income exchange traded funds and IndexIQ is helping speed that movement along. Last month, IndexIQ introduced the IQ Enhanced Core Bond U.S. ETF (AGGE) and the IQ Enhanced Core Plus Bond U.S. ETF (AGGP).
Both new funds are ETFs of ETFs, meaning that their holdings are other ETFs.
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AGGP’s underlying index yields 2.63 percent, according to issuer data. The new ETF charges 0.35 percent a year, or $35 per $10,000 invested.
“Emerging market debt has been a strong performer to start 2016, driven in large part by ongoing dovish Federal Reserve policies, improving emerging market fundamentals and a suddenly weakening dollar,” said Salvatore Bruno, CIO of IndexIQ, in a statement. “For the ‘core plus’ approach used in AGGP, we felt it was important to have this exposure as one area our index and the fund could access when total return momentum was in the category’s favor.”
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“The AGGE carries an expense ratio of 34 basis points and yields 2.9 percent at last check. It seeks to outperform the U.S. dollar-denominated, taxable, fixed income universe by using a momentum strategy that is measured by comparing a short-horizon (45-day) moving average of returns to a longer-horizon (90-day) moving average of returns, while taking into account recent volatility of each sector,” reports TheStreet.com.
Investors may be attracted to the cheap valuations and wider yield premiums that these bonds offer over safe-haven government bonds after benchmark yields on 10-year Treasuries dipped back toward all-time lows. Moreover, the rebound in energy prices could have reassured investor fears of a potential defaults in the energy space.
AGGE tracks the IQ Enhanced Core Bond U.S. Index. Top holdings in that benchmark include investment-grade and intermediate-term corporate bond ETFs, such as the the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) .
According to Bank of America Merrill Lynch index data, risk premiums on U.S. investment-grade corporate debt have been cut by half a percentage point since mid-February due to rising demand from Asian and European investors. Hans Mikkelsen, head of U.S. investment-grade credit research at Bank of America Merrill Lynch, anticipates that by the year-end, premiums could dip to about 1.5 percentage points from current levels of around 1.72 percentage points as European and Asian investors funnel as much as $500 billion into American corporate bonds in 2016, or up 50% year-over-year.
Tom Lydon’s clients own shares of LQD.