IndexIQ unveils momentum-tilted short-duration bond ETF

Dec 18th, 2018 | By | Category: Fixed Income

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IndexIQ, a New York Life Investments company, has launched the IQ Short Duration Enhanced Core Bond US ETF (SDAG US) on NYSE Arca.

Salvatore Bruno, Chief Investment Officer at IndexIQ

Salvatore Bruno, Chief Investment Officer at IndexIQ.

SDAG tracks the IQ Short Duration Enhanced Core Bond US Index which uses a momentum-tilted factor strategy in a bid to outperform the market-value-weighted universe of short-duration, US dollar-denominated taxable bonds.

Salvatore Bruno, Chief Investment Officer at IndexIQ, commented, “After several years of abnormally low rates, we once again find ourselves in a rising rate environment, a situation where investors often move to the shorter end of the yield curve. By combining short-duration exposure with a momentum-driven approach, investors now have a powerful tool for gaining exposure to this key area of the fixed income market while also adding the potential for outperformance.”

The index consists of US-listed ETFs providing exposure to different sectors of the universe including short-term Treasuries, short-term investment grade corporate bonds, short-term US high yield debt, and investment grade floating rate securities.

ETFs must have AUM of at least $50 million to be eligible for index selection. Additionally, for ETFs providing essentially identical exposure to the same sector, the fund with the highest AUM or longest performance history is chosen to represent that sector.

Total return momentum is calculated for each approved ETF in the index by comparing its short-horizon (45-day) moving average of returns to its longer-horizon (90-day) moving average of returns.

The ETFs are then assigned ‘raw active weights’ linearly relative to the US dollar-denominated taxable fixed income universe such that those with stronger momentum receive a ‘positive raw active weight’ – its weight in the index is higher compared to the weight of the ETF’s represented sector in the parent universe. Similarly, those ETFs with weaker momentum receive a ‘negative raw active weight’.

Short-term US high yield debt and investment grade floating rate securities are each constrained to a 25% maximum final weight in the index.

The index is reconstituted annually and rebalanced monthly.

Kelly Ye, Director of Research at IndexIQ, said, “At IndexIQ, we are always looking for new ways to help investors meet their goals, particularly when it comes to income. The short-duration bond market is a logical next step in applying a factor-based approach to investing, and we believe SDAG serves as an important complement in many different types of yield-focused investors’ portfolios.”

SDAG comes with an expense ratio of 0.36%.

The fund complements IndexIQ’s existing line-up of factor-based fixed income ETFs, particularly the $50m IQ Enhanced Core Bond US ETF (AGGE US) and $250m IQ Enhanced Core Plus Bond US ETF (AGGP US), which were launched in May of 2016. The ETFs provide similar momentum-based strategies to SDAG with AGGE targeting a universe consisting of short, intermediate, and long-term Treasuries, investment grade corporate bonds, and investment grade mortgage-backed securities; while AGGP also includes US high yield and USD emerging market debt. AGGE and AGGP come with expense ratios of 0.30% and 0.38% respectively.

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