It’s been a good year to be involved with both high-yield and investment-grade corporate debt. Indeed, the two largest ETFs addressing those corners of the bond market are up an average of 7% year-to-date as of September 26.
That doesn’t mean upside is limited from here. In fact, ETFs such as the Neuberger Berman Flexible Credit Income ETF (NBFC ) could be enticing for income investors here and now. Reasons for that extend beyond expectations that the Federal Reserve has several more interest rate cuts ahead of it.
As its name implies, NBFC is flexible. The actively managed ETF, which debuted in June 2024, holds a mix of investment-grade and junk debt. It leans more heavily into the latter. However, the fund’s exposure to higher quality corporates should not be diminished. Indeed, that investment-grade company-issued debt currently sports tempting yields.
Yield Opportunities Abound
NBFC carries a 30-day SEC yield of 6.39%. That alone is impressive, but there’s more to the story. As noted above, some of NBFC’s yield story derives from investment-grade bonds. Broadly speaking, that group is sporting higher-than-average yields.
“Investment-grade corporate bonds are also sitting near the top of their range for the last 15 years. To put this into perspective, average yields on these securities with intermediate-term maturities currently fall in the neighborhood of 4.25% to 5.50%,” according to Charles Schwab.
Remembering that bond prices and yield move inverse of each other. History indicates that the higher a bond’s yield when an investor gets involved, the shorter the buyer’s odds are of success. Arguably, that makes NBFC’s somewhat elevated yield appealing. It implies there’s room for downside, meaning the ETF’s holdings would be increasing in value.
“Importantly, today’s yields on investment-grade corporate bonds may be good indicators of their future total returns. This makes investment-grade corporate bonds an appealing option for investors who are particularly concerned about how their bond portfolio may perform when the future path of interest rates is at least somewhat unknowable,” added Schwab.
Advisors and investors considering NBFC should remember that history doesn’t always repeat. However, fixed income history confirms a noteworthy relationship between investment-grade corporate bonds’ starting yields and future performance.
“This relationship may provide some comfort for bond investors who are looking for yield but are unsure about what the future might bring,” concluded Schwab.
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