Key Takeaways

• Investors using a barbell approach in fixed income can potentially enhance returns by adding securitized assets, such as the WisdomTree Mortgage Plus Bond Fund (MTGP), as a supplementary “plus” component.
• With current agency MBS spreads above their 10-year median and the Fed’s rate cut cycle underway, MTGP offers a relative value opportunity versus investment grade corporates.
• MTGP's blend of agency/non-agency MBS and other securitized assets presents an actively managed solution that could add yield and effectively manage duration within a balanced fixed income portfolio.
   

Within any fixed income portfolio, one should strive to build a foundation and then potentially supplement this “core” with an added component. I’ve discussed rather frequently how a barbell approach represents a time-tested, user-friendly solution to achieve a bond investor’s foundational goal. But what strategy should an investor consider as the “supplement” to the barbell approach? That’s what I wanted to discuss in this blog post.

As a reminder, I recently blogged about a “Barbell for Rate Cuts” using our in-house WisdomTree Funds for Treasury floating rate notes (USFR) paired with our yield enhanced agg strategy (AGGY). This foundation offers investors a means of achieving a balance between such key factors as income, performance and managing volatility.

Once you have this foundation of your fixed income portfolio allocated, you can then consider options on how to potentially build out from there. In my opinion, one such option to consider is in the securitized fixed income space. Securitized fixed income is a debt security whose value is backed by an asset or pool of assets. Some more common examples are assets such as mortgage-backed securities (MBS), collateralized loan obligations (CLOs) and asset-backed securities (ABS). Within the MBS universe, there are well-known investments from agencies and government-sponsored enterprises like Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC). This group of MBS securities are under the conservatorship of the U.S. government. There are also non-agency MBS. CLOs are typically senior-secured, below investment-grade debt, while auto loans are an example of ABS.

Our in-house barbell plus strategy would add the WisdomTree Mortgage Plus Bond Fund (MTGP) to the solution.

• What is MTGP?
  • Think of the strategy/Fund as two key components: 1) Agency (Ginnie, Fannie Mae, etc.)/Non-Agency MBS and 2) Securitized products such as CLOs and ABS
  • MTGP's make-up as of October 25, 2024, was 98% investment grade and 1.8% BB-rated

• Why should I buy MTGP?
  • Agency MBS spreads are now above their 10-year median, offering value relative to investment-grade corporates (see below)
  • The MBS space can be characterized as interest rate sensitive, so the current Fed rate cut cycle should be supportive for valuations
  • Continued modest/moderate economic growth provides a supportive platform for the securitized portion of MTGP
  • As of October 25, 2024, the MTGP average yield-to-maturity was 5.23%, 56 basis points better than the Agg; MTGP's duration was 5.4 relative to the Agg’s 6.2 years
  • The Fund is actively managed by Voya, a well-respected manager in the securitized asset class

Agency MBS vs. Investment-Grade Corporate Spreads

Source: Bloomberg, as of 9/17/24.
 

Conclusion

As investors await what the current Fed rate cut cycle will ultimately look like, the barbell approach to fixed income is a way to invest without making high conviction interest rate calls. By adding a ”plus” component to the mix, investors can supplement their income needs without sacrificing the prudent strategy of building a foundation for their bond portfolios first.

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