ETF Watch: Nuveen Debuts 1-5 Year Bond Fund

Today Nuveen is rolling out a fixed-income ETF that will offer a smart-beta twist on the short-term bond segment. The NuShares Enhanced Yield 1-5 Year U.S. Aggregate Bond ETF (NUSA) tracks a version of the BoA Merrill Lynch 1-5 Year US Broad Market Index, which covers investment-grade U.S.-dollar-denominated debt maturing in one to five years.

NUSA comes with an expense ratio of 0.20% and is listed on the NYSE Arca.

"With the launch of NUSA, similar to what we did with NUAG—our first launch—we’re continuing to address concerns about the market cap weighting of traditional fixed income benchmarks, which may allocate more weight to entities that are actually issuing increasing amounts of debt," said Jordan Farris, head of ETF product development at Nuveen.

The fund’s underlying index sorts its holdings into categories based on credit quality, maturity and sector, among other criteria. The index methodology overweights the higher-yielding categories while seeking to maintain a similar level of risk and credit quality as the original index. 

"Based on research done here at Nuveen, we show that yield has historically been one of the biggest drivers of return within the 1-5 year aggregate bond universe. Within NUSA, the enhanced yield part really refers to assigning weights based on the tendency for higher-yielding assets to provide higher returns,” Farris said.

Controlling Exposure

“We want to do this within a rules-based framework so we keep the effective duration of NUSA within a month and a half of the traditional 1-5 year aggregate bond universe, in addition to risk constraints in place to control exposure to asset class, maturity, credit quality and sector," he added.

Farris also pointed out that NUSA currently has roughly half the duration of the traditional U.S. aggregate bond universe, but 80% of the yield. He says it is likely to appeal to investors who have concerns about interest rate risk but still want to maintain an investment-grade portfolio.

Last year, Nuveen launched the NuShares Enhanced Yield U.S. Aggregate Bond ETF (NUAG). The fund is broader in scope than NUSA but uses a similar methodology. It currently has $51 million in assets under management.

Contact Heather Bell at [email protected].