The Fed released the minutes from its March meeting Wednesday, driving the U.S. Two-year Treasury yield down by market close. The minutes revealed that the Fed expects last month’s banking crisis to induce a recession later this year, which may limit its ability to raise rates further. As yields fall in turn, it may be time to take a look at how an active multi-sector income ETF can still wring solid returns out of a spectrum of fixed income securities.
Short-term offerings had been a popular space to start the year given the yields that were available there, putting the “income” back in fixed income. But investors should remember that long-term bonds have their place, too, as a source of yield.
On top of that, bonds are not the be-all, end-all of the fixed income world – the income is back in all of fixed income, and investors have the opportunity to access a broad swath of that world in a multi-sector income ETF duo like that of the American Century Multisector Income ETF (MUSI ) and the recently launched American Century Multisector Floating Income ETF (FUSI ).
Active ETFs have been all the rage to start 2023, and with their usage rising among all sorts of investors and advisors, an active duo like MUSI and FUSI merits a look. Both aim to provide current income, with slightly different approaches. MUSI has a wide remit, investing in high yield, bank loans, U.S. and foreign-currency-based securities, as well as preferred stock and various derivatives.
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MUSI uses a sector rotation approach to select its securities and doesn’t include a specific target duration, either, on top of a 4.3% annual dividend yield that has outperformed its ETF Database Category Average by 1.2%, according to VettaFi. It’s also added $4.3 million in net inflows over the last month for a 36 basis point (bps) fee.
FUSI, meanwhile, leans on the floating rate side of the fixed income street, investing in securitized debt like collateralized loan obligations (CLOs) and mortgage and agency-backed securities. It’s also allowed a 35% allocation to below investment-grade securities, too, employing a similar sector rotation model backed by fundamental and technical research as MUSI does. FUSI charges 27 bps for its approach and has already hit $20 million in AUM since its launch last month.
The current short-term Treasury-flavored fixed income party won’t last forever with the Fed no longer so intent on raising rates, based on those recent minutes. If so, having a multi-sector income ETF strategy that explicitly hunts for current income across the sectors that are best suite for the given market may be a worthwhile add to a portfolio in the weeks and months to come.
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