Advisors don’t want to take on much interest rate risk. But many are willing to take on some credit risk. This is one of the takeaways from last week’s VettaFi Income Investment Strategy Symposium.
There were 440 attendees for our five-part virtual event. I co-moderated the event with my fellow VettaFi Voice research colleagues. We covered a range of topics including where in fixed income the risks are being rewarded, tax-free alternatives, preferred stock, and collateralized loan obligations (CLOs). If you missed it, you should register and catch the event replay.
VettaFi asked attendees many questions to get a sense of advisor sentiment toward income. One of the questions was, “Which best describes your focus in fixed income over the next three months?” The most popular answer (43%) was to take higher credit risk but low duration risk.
This was closely followed by taking on low credit and low duration risk (38%). Even though the market expects rate cuts in the future, only 19% of the respondents want to take on higher duration risk..
Thankfully, the ETF industry has given advisors many tools to support their objectives. Let’s explore some of them with only one ETF per firm mentioned.
Short-Term Investment Grade Corporate Bonds
Investors have gravitated toward ultra-short Treasury ETFs in the first four months of the year. This has occurred due to a flight to safety. However, investment-grade corporate bonds can still provide some stability.
The Vanguard Short-Term Corporate Bond ETF (VCSH ) sports a 30-day SEC yield of 4.7%. Assets are mostly split between A- and BBB-rated bonds. The fund’s average duration of 2.6 years puts it in the low duration camp.
Another option is the iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB ). The fund has a 4.8% yield and an average duration of 2.7 years. IGSB has a similar focus on lower-investment-grade bonds as VCSH.
Taking an Active Approach to Short-Term Investing
We continue to see growing demand for actively managed fixed income ETFs. Advisors want help navigating the bond market. The Neuberger Berman Short Duration Income ETF (NBSD ) is one such fund.
NBSD’s average duration was 1.89 years and the fund sported a 5.3% yield. The fund was mostly a mix of investment-grade credit (37% of assets), securitized debt (34%) and agency mortgage=backed securities (11%). NBSD had 15% in speculative-grade or nonrated debt.
Floating Rate CLOs Limited Rate Risk
The above poll was conducted during a symposium session with Eldridge on the fundamentals of CLOs. These floating rate instruments also have low duration but can sport higher yields. For example, the Eldridge BBB-B CLO ETF (CLOZ ) has a 30-day SEC yield of 8.4%. Eldridge’s Danielle Gilbert talked about the historically low default rates of CLOs during the VettaFi Income event.
Another higher-credit risk CLO ETF to consider is the Janus Henderson B-BBB CLO ETF (JBBB ). This ETF has a 7.5% yield and an effective duration of 0.2 years.
Higher Yields Also Available Through Corporates
The SPDR Bloomberg Short Term High Yield Bond ETF (SJNK ) has an 8.0% yield. Assets are mostly in BB- and B-rated bonds, but there is some exposure to CCC-rated instruments. SJNK’s average duration of 2.2 years is lower than traditional high yield bond ETFs. The Xtrackers Short Duration High Yield Bond ETF (SHYL ) is another option, with an 8.0% yield.
For more news, information, and analysis, visit the Fixed Income Channel.
