Nuveen’s New ETF Take On The Barclays Agg

September 23, 2016

Nuveen is the latest investment manager to enter the ETF space, with the launch of a fixed-income ETF designed to improve on a classic: the Barclays Aggregate.

The NuShares Enhanced Yield U.S. Aggregate Bond ETF (NUAG), tracking the BofA Merrill Lynch Enhanced Yield US Broad Bond Index, offers investors additional yield without much additional risk. The fund costs 0.20% in expense ratio.

To Nuveen, which manages nearly $240 billion in assets, NUAG is just the first ETF in a lineup the firm plans to bring out in the next few years. Martin Kremenstein, head of ETFs for Nuveen, tells us what’s driving the company’s efforts. Your first ETF is an index-based enhanced yield ETF. Is this strategy meant to be a better take, or a higher-yielding take, on the Barclays Agg?

Martin Kremenstein: Yes, it's meant to be a core fixed-income replacement. It’s basically breaking the link between issuance weighting and the weighting in your portfolio. So rather than weight by issuance, what we do is start off with the Merrill Lynch Broad Market Index, which is basically equivalent to the Barclays Agg, and then, through a series of control of the risk parameters, we overweight higher-yielding sectors.

We divide up the aggregate universe into 38 sectors by maturity, and by underlying asset class, like Treasurys, corporates, securitized debt, and then, within those maturities and asset classes, by credit rating.

The idea is that you take the highest-yielding subsector and you overweight it within a certain limit, and then you underweight the same amount in the lowest-yielding sector. We’re creating a very-risk-controlled way of enhancing yield. Our quant research team identified that, within the aggregate universe, yield is the biggest driver of returns for investment-grade investors. Therefore, you should be overweighting toward yield to try and generate the best outcome.

We keep the option-adjusted duration of the portfolio within a quarter of the year of the underlying broad market index. And we keep the key rate risk the same as well. You can basically keep duration the same, but overweight 10-year and underweight five-year. We keep those key rates the same so that if interest rates rise and if the interest rate curve shape changes, investing in the fund shouldn't be unduly harmed or have outcomes that we're not expecting.


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