The Index strategy is based on qualitative and quantitative inputs including economic data and interpretations of government policy. Asset allocation guardrails include 50% – 200% allocation relative to the benchmark for credit, duration, and structure/mortgage weight. A high-conviction exposure to more speculative or diversifying positions is constrained to 0% – 20%.
The characteristics below reflect how we would best position a portfolio of fixed-income ETFs to achieve maximum total return over a comparable baseline neutral portfolio of fixed-income securities (benchmark).
Relative Positioning
Duration
Neutral Duration
Yield Curve
Neutral
Corporate Credit
Underweight
Securitized
Underweight MBS
Conviction
10% USD Bullish
Rationale
Neutral Duration
In May, the Index moved from an underweight duration position to neutral. The yield for the 10-year has moved from below 4% last December to over 4.70%.
We have expected the 10-year yield to move to a range of 5.00% to 5.50%, but most of this move is complete. As such, the Index is moving to a neutral duration.
No Curve Position
The Index holds no curve position relative to the benchmark.
90% Underweight Credit
In January, the Index took an underweight position in corporate bonds relative to our benchmark due to record corporate bond issuance and an overbought equity market.
Given similar conditions, the Index will maintain this position.
90% Underweight Securitized
In May, the Index increased its allocation to MBS from 80% to 90%.
Falling volatility (in red, the MOVE Index) helps securitized assets perform better. Elevated volatility is falling because the Federal Reserve’s expected rate cuts are disappearing. Given this, the bond market uncertainty index should fall.
However, as discussed above, if the economy stays strong and inflation surprises, uncertainty is expected to return to the bond market, making more than one rate cut difficult.
10% USD Bullish Conviction Allocation
Last month, the Index added a 10% long U.S. dollar conviction position. This bet would benefit if the U.S. economy outperforms the rest of the world, leading to higher yields and a strong dollar.
The previous 10% short TIPS position has been removed. The Index benefitted from this exposure, however, these securities are now properly pricing expected returns.
Allocation Changes
| Name | May 2024 | April 2024 |
|---|---|---|
| iShares MBS ETF | 25.40 | 22.75 |
| iShares 3-7 Year Treasury Bond ETF | 16.36 | 5.21 |
| WisdomTree BBG USD Bullish Fund | 10.00 | 10.00 |
| Schwab Long-Term U.S. Treasury ETF | 9.10 | 7.75 |
| Vanguard Short-Term Corporate Bond ETF | 7.65 | 6.69 |
| Vanguard Long-Term Corporate Bond ETF | 7.40 | 8.10 |
| Vanguard Intermediate-Term Corporate Bond ETF | 6.84 | 7.00 |
| iShares 7-10 Year Treasury Bond ETF | 6.35 | 6.25 |
| Schwab Short-Term U.S. Treasury ETF | 5.90 | 5.50 |
| iShares BBB Rated Corporate Bond ETF | 5.00 | 5.00 |
| WisdomTree Floating Rate Treasury ETF | 0.00 | 5.75 |
| iShares 0-5 Year TIPS Bond ETF | 0.00 | 10.00 |