Kevin Flanagan on Enhancing Yield with a Barbell Approach

September 25, 2019
Our Head of Fixed Income Strategy, Kevin Flanagan, met with the Founder & CEO of RIA Channel, Julie Cooling, to discuss how fixed income investors can potentially enhance yield with a WisdomTree barbell strategy. 

Julie Cooling: Hi. I’m Julie Cooling, Founder of RIA Channel. I’m here at Nasdaq MarketSite with Kevin Flanagan, Head of Fixed Income Strategy for WisdomTree. Kevin, thanks so much for being with us.

Kevin Flanagan: Thanks for having me.

Julie Cooling: So, today you’re here to talk a little bit about fixed income, and specifically two ETFs and your barbell strategy. Can you dive right in?

Kevin Flanagan: Yeah, well you know, obviously a lot going on at the bond market. We’ve had a change of Fed landscape, even interest rates coming down in a visible way especially during the summer, lots of different cross currents. So, what we would do is try to come up with a solution. Say instead of focusing on one strategy or one specific fund, is there a strategy, a solution, that investors could look at that not only help with the current situation but also hopefully in 2020 and 2021.

Julie Cooling: And so, what are those strategies specifically?

Kevin Flanagan: Yeah, so the first one is our WisdomTree Floating Rate Treasury Fund that is based on the U.S. Treasury Two-Year Floating Rate Note. Interesting, a lot of people don’t realize when you talk about floaters, that Treasury actually has their own monthly issuance of these types of securities. And the what we do is we barbell it, we pair it with the WisdomTree Yield Enhanced U.S. Aggregate Bond Fund. And by using the barbell, which is literally, think of the weight-lifting apparatus, USFR, the Floating Rate Treasury is one weight and AGGY, the Yield Enhanced, is the other, and you can toggle back and forth and look for say short duration, longer duration, income needs, you think rates are going to fall, rates are going to go up. It kind of provides a nice balance in either direction.

Julie Cooling: So, when you say, ‘apply the barbell’, are the advisors themselves creating that balance or are you doing that for them? I know that WisdomTree has a whole team that does help with portfolio construction. Talk to how it’s implemented.

Kevin Flanagan: So, what we do is we start off with say a basic benchmark for the strategy, where we think makes some sense trying to compare it to the benchmark in fixed income in terms of duration, in terms of yield. So, you could have a starting point of say 70/30 or a 60/40 AGGY to USFR, and depending upon what your needs are, what your wants are, what your parameters as an investor, maybe you flip-flop that to a 40/60 or a 30/70. I think that’s the beauty of the strategy. It provides flexibility in this environment. So, we start you off with some numbers and then you can toggle or adjust it to your investment needs.

Julie Cooling: Great, and how are advisors using as far as a fixed income component? Is it the full allocation to fixed income for their clients?

Kevin Flanagan: Interesting question. We’ve seen both ways. Some look at it perhaps as just a core type of component and maybe they would layer in an emerging market or high yield to it. Others, in the environment we’re in, may think that credit is expensive, or I don’t want to be in emerging market, I want to reduce some of my risk profile, and they would just use it for their entire fixed income part of their portfolio. So, I’ve seen it used both ways. 

Julie Cooling: And as the Head of Fixed Income Strategy for WisdomTree, where are your biggest concerns regarding where folks are going to find income next year and beyond? I mean, there is so much happening in global markets.

Kevin Flanagan: Yeah, it’s strange, right? We’ve done like a full circle. We’ve come all the way around to where we were in 2016. We were talking about interest rates hitting historical lows or coming close to historical lows. So, income needs are very important, but in this environment where we’re seeing headlines coming out at any given time creating volatility in the markets, it’s nice also to have perhaps some time of mitigating factor for your portfolio as well. So, you don’t want to be maybe too heavily in long duration or short duration. You want to look at the shape of the yield curve and try to use it to your advantage going forward.

Julie Cooling: Wonderful. Very insightful, Kevin. Thanks so much for being with me today.

Kevin Flanagan: Thank you very much.