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
Underweight
Yield Curve
Slightly Bulleted
Corporate Credit
Underweight
Securitized
Overweight MBS
Conviction
15% 0-5 US TIPS & 5% USD Bullish
Rationale
90% Underweight Duration
In August, the Index moved from neutral duration to 90% underweight the benchmark’s duration.
The committee expects the economy and inflation to remain stronger than expectations, resulting in higher yields over the next several months.
As of the end of September, the index remains 90% duration.
Slightly Bulleted Curve Position
The Index holds a slightly bulleted curve position relative to the benchmark.
The curve recently uninverted. Given the Fed’s projected cutting path, the committee anticipates the steepening will accelerate, providing benefit to a bulleted structure.
70% Underweight Credit
In January, the Index took a 90% underweight position in corporate bonds relative to the benchmark due to record corporate bond issuance and an overbought equity market.
Given further acceleration of these conditions, the committee decided to move from 90% to 70% underweight credit relative to the benchmark.
120% Overweight Allocation With 50% Allocation to Current Coupon MBS
The index previously held a neutral allocation to MBS. This October, the committee is moving to 120% overweight MBS relative to the benchmark.
In addition, the securitized sector of the Index holds a 50% position in current coupon to-be-annouced MBS issues.
Falling volatility (in red, the MOVE Index) helps securitized assets perform better.
15% 0- to 5-Year U.S. TIPS & 5% USD Bullish Conviction Allocation
The Index is increasing its allocation to 0- to 5-year U.S. TIPS from 5% in September to 15% in October in addition to the 5% allocation to USD which has remained the same.
The bullish USD bet would benefit if the U.S. economy outperforms the rest of the world, leading to higher yields and a strong dollar.
The short TIPS position would benefit from higher-than-expected inflation readings.
Allocation Changes
| Name | October 2024 | September 2024 |
|---|---|---|
| iShares MBS ETF | 16.70 | 14.00 |
| Simplify MBS ETF | 16.65 | 13.90 |
| iShares 0-5 Year TIPS Bond ETF | 15.00 | 5.00 |
| iShares 7-10 Year Treasury Bond ETF | 8.50 | 4.55 |
| iShares 3-7 Year Treasury Bond ETF | 8.30 | 12.10 |
| Vanguard Intermediate-Term Corporate Bond ETF | 7.35 | 5.70 |
| Schwab Long-Term U.S. Treasury ETF | 7.30 | 8.80 |
| WisdomTree BBG USD Bullish Fund | 5.00 | 5.00 |
| iShares BBB Rated Corporate Bond ETF | 5.00 | 5.00 |
| Vanguard Long-Term Corporate Bond ETF | 4.75 | 7.20 |
| Vanguard Short-Term Corporate Bond ETF | 3.25 | 8.75 |
| Schwab Short-Term U.S. Treasury ETF | 2.20 | 10.00 |