IndexIQ launches first smart beta fixed income ETFs

May 16th, 2016 | By | Category: Fixed Income

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New York-based asset manager IndexIQ has launched the first exchange-traded funds to introduce a momentum investing approach to fixed income markets. The IQ Enhanced Core Bond US ETF (AGGE) and IQ Enhanced Core Plus Bond US ETF (AGGP) have begun trading on the NYSE Arca.

IndexIQ launch first smart beta fixed income ETFs to harness momentum factor

The ETFs adopt a ‘fund of funds’ structure, investing in fixed income sector ETFs that are displaying the strongest positive total return momentum.

The ETFs adopt a ‘fund of funds’ structure, investing in fixed income sector ETFs that are displaying the strongest positive total return momentum.

AGGE invests in sectors across the US investment grade fixed income market (short term Treasuries, intermediate term Treasuries, long term Treasuries, investment grade corporate bonds and investment grade mortgage-backed securities). Each sector is ranked based on their total return momentum by comparing their 45-day moving average of returns to their 90-day moving averages. The fund’s underlying index, the IQ Enhanced Core Bond US Index, thereby weights each of the sectors within the investment grade market, overweighting those sectors with high momentum and underweighting those with low momentum. Each sector is subject to a 50% maximum final weight in the index.

AGGP employs the same investment approach, providing exposures to Treasuries, US investment grade corporates and US investment grade mortgage-backed securities, with the added ability to include exposure to US high yield debt and US dollar denominated debt of emerging market issuers. The fund tracks the IQ Enhanced Core Plus Bond US Index which limits final exposure to the US high yield sector and emerging market debt to 25% and 5% respectively.

Poul Kristensen, Chief Economist, Portfolio Manager and co-Head of New York Life’s Strategic Asset Allocation & Solutions (SAS) Group, said in a statement: “These new funds allow investors to take a factor-based approach to fixed income investing, providing core exposure across a broad range of fixed income sectors. By employing a momentum strategy, these funds and their underlying indexes are designed to seek enhanced returns by seeking to capitalize on the persistence of ongoing trends in the market.”

Salvatore Bruno, CIO of IndexIQ, added: “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… 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 favour.”

Each new offering is a fund of funds meaning it invests in other ETFs to gain its required exposures. This is appropriate for funds of this nature which can benefit from the increased liquidity of ETFs compared to actual bonds. This allows them to rapidly move into and out of US fixed income sectors without causing much market impact.

“ETF innovation is something we take very seriously,” added Adam Pattie, CEO of IndexIQ. “With AGGE and AGGP, investors looking to get more from their core bond portfolios have an important new set of tools in their search for yield. We look forward to bringing more ideas and solutions like these to market in the coming months.”

As of 11 May 2016, AGGE is invested primarily in the iShares iBoxx $ Investment Grade Corporate Bond ETF (27.7%), the Vanguard Mortgage-Backed Security ETF (27.2%), the Vanguard Intermediate-Term Corporate Bond ETF (21.5%), the SPDR Barclays Mortgage Backed Security ETF (13.5%) and the iShares MBS ETF (9.3%). The fund has a total expense ratio of 0.34% due to a 0.05% fee waiver in place until August 2017.

As of 11 May 2016, AGGP is invested in the iShares iBoxx Investment Grade Corporate Bond ETF (27.7%), the Vanguard Intermediate-Term Corporate Bond ETF (21.5%), the SPDR Barclays Mortgage Backed Security ETF (13.4%), the Vanguard Mortgage-Backed Security ETF (13.1%), the SPDR Barclays Long Term Treasury ETF (10.6%). The fund has a total expense ratio of 0.35% due to a 0.05% fee waiver in place until August 2017.

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