ETF Specialist

Going Light on Treasuries for a Heavier Yield

Phillip Yoo, CAIA

Responding to the financial crisis, the U.S. Federal Reserve lowered the federal-funds rate to near zero in 2008. Around that time, the Treasury Department started issuing a record amount of bonds to address long-term Medicare and Social Security expenses while taking advantage of low interest rates. As a result, Treasuries' share of the investment-grade universe climbed significantly. The market-cap-weighted Bloomberg Barclays U.S. Aggregate Bond Index, which is the most widely cited U.S. investment-grade benchmark, now has more than one third of its portfolio invested in Treasuries. Moreover, yields on U.S. Treasuries are at their near-historic low, and it is quite telling that the 30-year Treasury yielded 3% as of June 11, 2018. Consequently, funds tracking that index have delivered low returns.  WisdomTree Barclays Yield Enhanced U.S. Aggregate Bond ETF (AGGY) attempts to boost its return by reweighting the components of the Aggregate Index.

However, this additional yield is not free. It comes with greater credit risk and often slightly greater interest-rate risk. This trait, coupled with the fund's relatively short record, limits the strategy to a Morningstar Analyst Rating of Bronze.

Phillip Yoo, CAIA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.