Aggregate bond ETFs are popular because these funds typically have low annual expense ratios and hold thousands of bonds. However, old guard aggregate bond ETFs aren’t perfect.
Certainly not at a time when interest rate risk is elevated and clarity from the Federal Reserve is low. That said, “agg” bond ETF shoppers may want to turn their attention to the WisdomTree Interest Rate Hedged U.S. Aggregate Bond Fund (AGZD) over the near-term. In fact, it’s not a stretch to say AGZD, which turns 13 in December, is the ideal aggregate bond ETF for the current bond market climate.
With an effective duration of just 0.04 years, the WisdomTree ETF essentially eliminates the rate risk inherent with unhedged aggregate bond ETFs. That point should not be overlooked at a time when some Fed members firmly believe that rates need to rise at some point this year to ward off inflation.
Favorable Angles on AGZD
AGZD’s diminished rate sensitivity is also advantageous against the backdrop of a quieter Fed. New Chairman Kevin Warsh is, as expected, employing a less communicative policy. That’s an effort to prevent markets from misinterpreting Fed speak.
Arguably, it’s a noble pursuit, but one bond market participants aren’t accustomed to. It will take some getting used to, and now may not be the time for less clarity. If anything, investors want ambiguity to decrease.
“The complete lack of forward guidance from Warsh has created an elevated uncertainty quotient for the bond market, resulting in elevated volatility and interest rate (duration) risks,” according to WisdomTree. “Oftentimes, the yield on maturities such as the ten-year note, carry a term premium, or the extra yield needed to compensate for such uncertainties. Throw this on top of inflation concerns and you get a recipe for higher long-term rates.”
AGZD’s perks don’t imply that investors are required to make an income sacrifice. Actually, the ETF’s 30-day SEC yield of 4.34% is downright tantalizing when factoring in the fund’s reduced rate sensitivity. That solid income compels all the more, considering that the bond market is unlikely to notch significant upside soon.
“There’s good reason to think rates could move higher still, particularly as bond supply across the market continues to grow. We still do not see a noteworthy bond market rally anytime soon, and technical analysis suggests that we are not oversold yet,” added WisdomTree.
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