AGZD delivers the returns of the broad U.S. investment-grade bond market while neutralizing interest rate risk through short Treasury futures positions. It's essentially the Barclays Aggregate index with built-in duration hedging, designed to capture credit spreads without the pain of rising rates.
How It Works
The fund holds a portfolio mirroring the Bloomberg U.S. Aggregate Bond Index — roughly 40% Treasuries, 25% mortgages, 35% corporates — then layers on short positions in Treasury futures to offset duration exposure. This creates a near-zero duration portfolio that still collects the yield spread between corporates/mortgages and Treasuries. Rebalances monthly to maintain the hedge ratio as the underlying portfolio's duration shifts.
Key Features
- Zero duration exposure while maintaining full credit spread capture from investment-grade bonds
- 3.37% yield comes entirely from credit spreads, not interest rate risk
- One-fund solution for rate hedging versus buying AGG plus shorting futures yourself
Risks
- Credit spreads can widen 100-200bps in recessions, causing 3-6% losses despite rate hedge
- Hedging costs money — you're giving up the Treasury portion of returns, which hurts in flight-to-quality scenarios
- Mortgage prepayment risk remains fully exposed when rates fall and homeowners refinance
Who Should Own This
Perfect for investors who want bond income but expect the Fed to keep hiking — or just can't stomach duration risk after 2022's bond massacre. Works best as a tactical position when you're bearish on rates but still need fixed income exposure, or as a permanent allocation for those who view duration as unrewarded risk in a normalized rate environment.