With all the recent attention lavished upon alternative income and private credit in the ETF wrapper, some investors may think the combination is a new concept.
It’s young, though not necessarily new. Just look at the four-year-old WisdomTree Alternative Income Fund (HYIN ). Four isn’t old in ETF terms, but in the private credit category, HYIN is a seasoned veteran. Of course, age is nothing but a number; it’s not a determinant of an ETF’s ability to generate solid returns.
Speaking of numbers, HYIN sports an eye-catching 30-day SEC yield of 11.56%, confirming it’s a credible income play. Beyond that tantalizing income stream, HYIN democratizes access to an asset class previously reserved for institutional investors and the ultra-wealthy. HYIN helps investors tap into potentially attractive, non-listed corners of the bond market. This goes beyond traditional, publicly traded investment-grade and junk debt.
Battle-Testing HYIN
HYIN’s relative youth belies that it is battle-tested. Over HYIN’s lifespan, the Federal Reserve set out upon one of its most intense rate-hiking campaigns in decades, which it followed with the current cycle of cuts.
“These two distinct monetary policy cycles brought interest rates back to more historical norms and offer a glimpse of the yield readings investors should more likely witness going forward and how private/alternative credit fared versus core fixed income during this three-year period,” noted Kevin Flanagan, head of fixed income strategy at WisdomTree. “Over this three-year timeframe, HYIN outperformed the Bloomberg Barclays U.S. Aggregate Bond Index Aggregate Bond Index (Agg) by almost 20% (27.0% vs. +7.2%).”
As Flanagan points out, HYIN has been an “Agg” beater since it came to market. Over that period, the WisdomTree ETF returned nearly 10% while the Agg lost 3%. That speaks to the efficacy of alternative income, which in HYIN is a union of private and structured credit. HYIN’s structured credit sleeve features exposure to asset-backed securities (ABS), collateralized loan obligations (CLOs) and commercial mortgage bonds (CMBS).
Another nifty feature investors access with HYIN is that while the ETF could technically be categorized as a fixed income product, it offers increased levels of diversification; it’s not highly correlated to standard bond strategies.
“The private/alternative credit space can be used in a variety of ways in an overall investment portfolio. While this arena tends to fall under the fixed income umbrella, it actually has a low correlation to more rate-sensitive vehicles such as the Agg,” added Flanagan. “In addition, with credit spreads for the more traditional IG and HY sectors at historical lows, investors are offered another avenue to enhance yield.”
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