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% Senior Loans & 10% USD Bullish
Rationale
Neutral Duration
The committee moved to a neutral duration in mid-November. 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 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.
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 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% Senior Loans & 10% USD Bullish Conviction Allocation
In December, the Index held a 10% allocation to 0-5 US TIPS and 10% in WisdomTree’s USD Bullish fund.
The committee has decided to shift the 10% TIPS position into a 10% senior loan position. This position offers a higher yield compared to corporate bonds with more covenants.
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.
Allocation Changes
| Name | January 2025 | December 2024 |
|---|---|---|
| iShares MBS ETF | 26.80 | 26.90 |
| iShares 7-10 Year Treasury Bond ETF | 16.20 | 10.40 |
| Invesco Senior Loan ETF | 10.00 | 0.00 |
| WisdomTree BBG USD Bullish Fund | 10.00 | 10.00 |
| Vanguard Intermediate-Term Corporate Bond ETF | 9.10 | 8.55 |
| Simplify MBS ETF | 8.85 | 8.85 |
| Schwab Long-Term U.S. Treasury ETF | 7.25 | 9.90 |
| Vanguard Long-Term Corporate Bond ETF | 6.80 | 5.00 |
| iShares BBB Rated Corporate Bond ETF | 5.00 | 5.00 |
| iShares 3-7 Year Treasury Bond ETF | 0.00 | 2.00 |
| Vanguard Short-Term Corporate Bond ETF | 0.00 | 1.90 |
| Schwab Short-Term U.S. Treasury ETF | 0.00 | 1.50 |
| iShares 0-5 Year TIPS Bond ETF | 0.00 | 10.00 |