AGGH: Mastering Credit Risk in the Fed's Easing Turn

The Federal Reserve's pivot toward easing monetary policy has reshaped the fixed-income landscape, creating both opportunities and risks for bond investors. Amid this shifting environment, the Simplify Aggregate Bond ETF (AGGH) emerges as a compelling alternative to traditional aggregate bond funds. While its peers rely on passive indexing, AGGH employs active management and derivatives to mitigate credit risk, enhance yield, and navigate volatile markets—positioning it to outperform the Bloomberg US Aggregate Bond Index (^BBUSATR) during the Fed's rate-cut cycle.

The AGGH Edge: Active Management in Action
AGGH's strategy is built on three pillars: credit risk mitigation, yield curve positioning, and volatility harvesting. Unlike passive ETFs like the iShares Core U.S. Aggregate Bond ETF (AGG), which blindly track the bond market, AGGH uses derivatives to hedge against credit downgrades and sells options to generate income. For instance, its credit hedge overlay dynamically adjusts exposure to sectors like corporate bonds or mortgage-backed securities (MBS), reducing losses during credit crunches.
The fund's use of derivatives also allows it to exploit mispricings in the yield curve. In early 2025, AGGH extended duration in intermediate-term Treasuries while shorting longer-dated swaps—a move that capitalized on the steepening yield curve as the Fed signaled rate cuts. This tactical positioning contributed to its 1.97% return in 2023, outperforming the Aggregate's 1.25%.
Performance Consistency in Easing Cycles
The Fed's shift from rate hikes to cuts in 2024-2025 has been a tailwind for core bonds, but not all strategies are equal. AGGH's active duration management and yield enhancement give it an edge:
- Yield Advantage: AGGH's 7.00% yield (as of April 2025) versus the Aggregate's 4.28% reflects its focus on high-convexity assets like MBS, which offer wider spreads during volatile periods.
- Risk-Adjusted Returns: While AGGH's YTD 2024 return of -0.31% lagged the Aggregate's 2.15%, its annualized alpha of 1.55% (vs. the index) since 2023 underscores its ability to outperform over cycles.
Critics cite AGGH's complexity and past volatility—its -0.31% YTD in 2024 highlighted reliance on derivatives during uncertain Fed guidance. Yet this volatility is managed: Morningstar's “Average” rating for its People and Process pillars signals disciplined risk controls, while its -0.45% cash allocation avoids unnecessary exposure to equity swings.
Why Invest Now? The Fed's Easing Sweet Spot
The Fed's projected 150 basis points of rate cuts by end-2025 create a perfect storm for AGGH's strategy:
1. Credit Risk Mitigation: As the labor market cools (unemployment at 4.1% vs. 3.5% in 2022), AGGH's hedging can buffer against defaults.
2. Yield Curve Opportunities: A flattening yield curve later in 2025 will favor funds like AGGH, which can pivot to shorter durations if inflation resurges.
3. Volatility Harvesting Payday: The ICE BofA MOVE Index—a bond market volatility gauge—remains elevated at 120 (vs. a 10-year average of 90), making options sales a reliable income source.
Addressing Concerns: Complexity and Volatility
Skeptics argue that AGGH's derivatives-heavy approach is too aggressive for core bond allocations. Yet its net expense ratio of 0.29%—among the lowest in its peer group—offsets costs, while its focus on investment-grade securities aligns with risk-mitigation goals. Past underperformance in 2024 stemmed from timing missteps on rate cuts, but the Fed's clarity in 2025 has since stabilized expectations.
Conclusion: AGGH as the New Core Bond Benchmark
In an era of Fed uncertainty and rising credit risks, AGGH's blend of active management, yield enhancement, and disciplined hedging makes it a superior core bond holding. With the Fed's easing cycle in full swing and credit spreads widening, investors should allocate to AGGH now—before its alpha-generating strategies fully capture the upside.
Act decisively: Position for the Fed's next move with AGGH.
Comments
No comments yet