Barclays has launched the Barclays Rates Factor Indices, a suite of long-short indices designed to capture risk premia (including carry, value, and momentum factors) from interest rate markets.
The new family of indices includes two groups. One provides targeted exposure to each of the carry, value, and momentum factors, while the other provides multi-factor access to combinations of the three factors. Barclays believes the multi-factor approach will enable the indices to provide alternative sources of outperformance throughout the rates cycle.
The indices take a long position in government bond futures with the highest desired factor exposure and a short position in those with the lowest desired factor exposure. The indices are diversified across US, German, UK, Japanese and Australian markets.
Charles Fattouche, director in the Quantitative Investment Strategies team at Barclays, commented: “While bond markets saw a rally over the last three decades driven by the secular decline in yields, the outlook for long-only bond investors may be less promising at current levels. A systematic approach based on well-known factors or styles such as carry, value and momentum can offer Barclays clients alternative sources of outperformance within fixed income markets.”
Factor-based or smart beta investing is a well-established concept in equities markets, especially in the ETF space, but comparable investment approaches in fixed income have been slower to catch on. Bond indices have traditionally been weighted by liability, meaning the most indebted issuers receive the largest weight in the index. While market participants are well aware of the inherent downsides of this approach, alternatively weighted indices have struggled to gain the traction seen in the equity space due to a lack of data, less liquidity, and the increased complexity of the fixed income market.
Fabien Labouret, global head of investment strategies, Barclays, said: “The Barclays Rates Factor Indices are a significant addition to our highly successful suite of Quantitative Investment Strategies. Employing liquid fixed income instruments, the indices aim to address investors’ essential needs, capturing excess returns both in rising and falling yield environments.”
The single factor indices are: Rates Carry Factor, Rates Value Factor, Rates Momentum Factor and the multi-factor indices are: Rates Carry & Value Factor, Rates Value & Momentum Factor, Rates Carry & Momentum Factor, Rates Carry, Value & Momentum Factor.
European ETF investors looking for alternatively weighted fixed income exposure do have a few existing possibilities. The PIMCO Emerging Markets Advantage Local Bond Source UCITS ETF (EMLB LN) is the largest option with $283 million in assets under management (AUM). The fund, launched in September 2011, provides exposure to emerging markets local government debt weighted by issuer GDP. EMLB has a total expense ratio (TER) of 0.60%.
Also available is the db x-trackers iBoxx USD Emerging Sovereigns Quality Weighted UICTS ETF (XQUA LN) from Deutsche Asset Management, which weights government bonds according to the quality of the issuer. This means that countries with solid economic fundamentals will receive higher weights in the index than those with weak fundamentals. XQUA was launched in April 2016 and has AUM of $85m with a TER of 0.50%. There is also a euro-hedged version of the fund under the ticker symbol XQUE GR.
Lastly, the PowerShares US High Yield Fallen Angels UCITS ETF (HYFA LN) offers exposure to US corporate debt that has recently been downgraded from investment grade to high yield. The index seeks to take advantage of any overselling that may occur as part of this event, and securities in the index are ‘time-weighted’ with those issues most recently downgraded receiving a higher weight. The ETF was launched in September 2016 and has AUM of $39m with a TER of 0.45%. HYFA also comes in CHF-, EUR-, and GBP-hedged versions under the ticker symbols FACH SW, FAEU GR, and FAGB LN respectively.
Of the three funds, EMLB has been the standout performer over that last 12-months, returning 12.8% to 28 November. This compares favourably to traditionally weighted ETFs with similar exposure such as the iShares JP Morgan EM Local Government Bond UCITS ETF (SEML LN), which has returned only 6.9% in the same period.