Nasdaq Creates New Smart Beta Fixed Income Strategy

Using Relative Strength to Harvest Alpha in Fixed Income ETFs

Referred to as the Dorsey Wright Fixed Income Allocation Index, the ETF-linked index uses relative strength (a momentum factor investing technique) to compare and rank the best performing SPDR-related fixed income ETFs out of a total universe of 20 ETFs comprised of: floating rate notes; first lien senior secured floating rate bank loans; US non-convertibles; preferred stock and other preferred securities; US municipal bonds and US convertible securities; US and non-US developed and emerging market bonds; treasury bonds; corporate bonds; high yield bonds, and inflation protected bonds.

At any given time, the Index holds four ETFs from the SPDR product line that display the most powerful relative strength characteristics. Every week, the Dorsey Wright team evaluates the Index using what is known as ‘Point & Figure’ charting; an organised way of recording supply and demand within a security by focusing purely on the price movements of that security.

“The Index has at its disposal more than 20 different bond sub-sectors. It can go from being very sensitive to US 10-year rates to very insensitive to US 10-year rates and is designed to follow market driven trends, where traditional fixed income indexes cannot. At a time when the consensus market outlook is for low returns within traditional fixed income, the Index presents an opportunity to chase alpha that exists in some of the lesser-used areas of the bond market,” explains Paul Keeton (pictured), Vice President at Dorsey, Wright & Associates.

Read the entire article from Hedgeweek here.

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Dorsey, Wright calculates correlation (rate sensitivity) based upon 5 years of weekly return data of underlying securities or indices, compared to returns over the same period of the U.S. 10-year Treasury Yield Index. Neither the information within this email, nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made. This article not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation (express or implied) in this article, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.

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