Brocker.Org: A Shagadelic Idea for Short-Term Bonds

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Some fixed income market observers are now arguing that the Federal Reserve’s plans to raise interest rates again this year could be on hold. Even if that is not the case, preparing for a surprise shift in course with shorter-duration bonds could prove beneficial. A new bond exchange-traded fund (ETF) can help investors minimize interest rate risk without making significant income sacrifices. The WisdomTree Barclays Yield Enhanced U.S. Short-Term Aggregate Bond Fund (SHAG) debuted Thursday. SHAG tracks the Bloomberg Barclays U.S. Short Aggregate Enhanced Yield Index.

SHAG comes from solid DNA. The new ETF is the short-term answer to the WisdomTree Barclays Yield Enhanced U.S. Aggregate Bond Fund (AGGY). AGGY debuted nearly two years ago as an alternative to traditional aggregate bond funds, which are often too heavily weighted to U.S. government debt. AGGY has attracted a solid following, as highlighted by its more than $136 million in assets under management. (See also: The Good and Bad Bond ETFs.)

SHAG came to market with a weighted average coupon of 3.39, an average time to maturity of 5.76 years and an effective duration of zero years, according to WisdomTree data. Duration measures a bond’s sensitivity to changes in interest rates. The new ETF “draws on the same universe as the Bloomberg Barclays U.S. Aggregate Index, but focuses on ways to reduce interest rate risk while at the same time boosting yield,” according to a statement issued by New York-based WisdomTree. (See also: Advanced Bond Concepts: Duration.)

By virtue of the fact that most traditional bond ETFs are weighted by market value and that Uncle Sam is the largest bond issuer in the U.S., many aggregate bond funds feature large weights to lower-yielding Treasuries. Not only does that weigh on investors’ earned income, it also exposes them to interest rate risk when the Fed boosts borrowing costs. SHAG ameliorates that situation by underweighting​ Treasuries and putting more emphasis on higher-yielding corporate credit.

That does not mean investors take on more credit risk with SHAG. More than 64 percent of the new ETF’s holdings are rated either AAA or AA. The remainder are rated A or BBB. SHAG is also cost-effective with an annual expense ratio of just 0.12 percent, or $12 on a $10,000 investment. (See also: Top 5 Bond ETFs for 2017.)

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