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
Yield Curve
Bulleted
Corporate Credit
Underweight
Securitized
Overweight MBS
Conviction
10% 0-5 US TIPS & 10% USD Bullish
Rationale
Neutral Duration
The committee moved to a neutral duration in mid-November. In December, the Index remains at a neutral duration.
While the committee expects the economy and inflation to remain stronger than expected, the surge in yields since September warrants a more neutral stance.
Bulleted Curve Position
The Index holds a bulleted curve position relative to the benchmark.
Given the Fed’s projected cutting path, the committee anticipates the steepening will accelerate, benefiting 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 moved from 90% to 70% underweight credit relative to the benchmark in October.
The Index remains 70% underweight credit in Decmeber.
130% Overweight Allocation With 25% Allocation to Current Coupon MBS
In November, the Index moved to 130% overweight MBS relative to its benchmark. The Index continues to hold this position in December.
In addition, the Index’s securitized sector holds a 25% position in current coupon-to-be-announced MBS issues.
Falling volatility (in red, the MOVE Index) helps securitized assets perform better.
10% 0- to 5-Year U.S. TIPS & 10% USD Bullish Conviction Allocation
In November, the Index held a 10% allocation to 0-5 US TIPS and 10% in WisdomTree’s USD Bullish fund. Both positions remain unchanged.
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 TIPS position would benefit from higher-than-expected inflation readings.
Allocation Changes
| Name | December 2024 | November 15, 2024 |
|---|---|---|
| iShares MBS ETF | 26.90 | 26.85 |
| iShares 7-10 Year Treasury Bond ETF | 10.40 | 10.00 |
| iShares 0-5 Year TIPS Bond ETF | 10.00 | 10.00 |
| WisdomTree BBG USD Bullish Fund | 10.00 | 10.00 |
| Schwab Long-Term U.S. Treasury ETF | 9.90 | 10.00 |
| Simplify MBS ETF | 8.85 | 9.00 |
| Vanguard Intermediate-Term Corporate Bond ETF | 8.55 | 8.00 |
| Vanguard Long-Term Corporate Bond ETF | 5.00 | 5.15 |
| iShares BBB Rated Corporate Bond ETF | 5.00 | 5.00 |
| iShares 3-7 Year Treasury Bond ETF | 2.00 | 2.00 |
| Vanguard Short-Term Corporate Bond ETF | 1.90 | 2.50 |
| Schwab Short-Term U.S. Treasury ETF | 1.50 | 1.50 |