WisdomTree launches Canada aggregate bond ETF

Jun 26th, 2017 | By | Category: Fixed Income

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WisdomTree has unveiled the WisdomTree Yield Enhanced Canada Aggregate Bond Index ETF (Toronto: CAGG). The fund tracks the Bloomberg Barclays Canadian Aggregate Enhanced Yield Index, a rules-based index designed to provide exposure to Canadian investment grade bonds while enhancing yield.

WisdomTree launches Canada aggregate bond ETF

The WisdomTree Yield Enhanced Canada Aggregate Bond Index ETF seeks to earn a higher yield compared to the Bloomberg Barclays Canadian Aggregate Index while maintaining a similar risk profile.

The index re-weights subgroups of the Bloomberg Barclays Canadian Aggregate Index (CAD Agg) with the aim of earning a higher yield while maintaining a similar risk profile. It does this through three distinct steps.

Firstly it divides the CAD Agg into 12 subcomponents across sector, maturity and credit quality dimensions. While each component retains suitable size for investability and liquidity purposes, each bucket may present a unique combination of risk and reward.

Secondly, the index develops and applies constraints which serve to control risk and concentration while limiting turnover. This includes constraints on tracking error volatility (less than 0.35% per month), duration constraints (not greater than one year more than the CAD Agg), sector and subcomponent constraints (treasuries, credit, and government related sectors cannot deviate by more than 20% from their weights in the CAD Agg), credit quality constraints (notional weight of the Baa-rated subcomponents cannot deviate from their weights in the CAD Agg by more than 20%) and turnover constraints (portfolio turnover is capped at 5% per month).

Lastly, on a monthly basis, the weights of the index are reallocated across the 12 subcomponents to maximize yield, while adhering to all constraints. These weights are then applied at the individual issue level, such that the weight is the product of the subcomponent’s determined weight and the security’s weight within the subcomponent.

WisdomTree reports that the result of the above optimization process is that, as of 31 May 2017, the CAD Agg Enhanced Yield Index delivers an additional 55 basis points of yield relative to the CAD Agg with a similar volatility profile. The CAD Agg Enhanced Yield Index has a yield of 2.37% with a duration of 8.87 years, compared to 1.82% and 7.89 years for the CAD Agg.

According to WisdomTree, the fund may be used by investors as a core fixed income allocation within their portfolios. ‘Core’ ETFs – low cost, diversified funds designed to act as foundational building blocks for portfolio construction – are increasingly being identified by ETF issuers as the product segment with the highest growth potential in terms of investor demand.

The ETF is offered with a management expense ratio of 0.18%.

In addition, the firm has launched the WisdomTree Yield Enhanced Canada Short-Term Aggregate Bond Index ETF (CAGS) which seeks to enhance yield by sourcing and reweighting subcomponents within the 1-5 year segment of the Canadian Agg. CAGS tracks the Bloomberg Barclays Canadian Short Aggregate Enhanced Yield Index and also has a management expense ratio of 0.18%.

“Despite the prospect of rising interest rates, investors don’t have to look outside Canada to benefit from the steady income and lowered volatility expected from the bond market. These new offerings are designed to minimise portfolio exposure to low-yielding securities like treasuries and to enhance yield,” said Kurt MacAlpine, executive vice president, head of global distribution at WisdomTree. “Both CAGG and CAGS are great options for investors who are seeking to boost their incremental income potential while still mitigating risk.”

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