Given the recent market volatility, investors have been flocking to bonds. With the expectation of rate cuts to come and subsequently falling yields, fixed income investors can complement their current core exposure with the NEOS Enhanced Income Aggregate Bond ETF (BNDI ).
Capital markets are sensing that rate cuts are inevitable, but the amount and pace at which they come can offer differing views. On one end of the spectrum, looming rate cuts can happen swiftly.
“The Fed is going to have to lower rates faster and more aggressively than what the market’s priced in,” said Jamie Patton, co-head of global rates at TCW Group Inc, via a Bloomberg report.
With its active management strategy, BNDI seeks to distribute monthly income generated from investing in a representative portfolio of the U.S. aggregate bond market and implementing a data-driven put option strategy. The active management component allows BNDI to maintain pliability and flexibility in any market environment while also taking advantage of tax-loss harvesting opportunities. This is especially useful given the recent market volatility.
To extract more income from the market, the fund includes the sale of SPX Index options classified as section 1256 contracts, which are subject to lower 60/40 tax rates. This is where the fund’s tax efficiency offers investors income while decreasing their tax burden.
BNDI currently has a net expense ratio of 0.58%. The distribution yield is 5.76%, which is calculated by multiplying the most recent distribution by 12 to annualize it, and then dividing by the net asset value of BNDI.
Maintaining Core Exposure
While BNDI offers enhanced income exposure, it still maintains its core bond component. It goes so by adding exposure to two of the most common bond funds, offering deep diversification.
One of those funds is the iShares Core US Aggregate Bond ETF (AGG ), which seeks to track the investment results of an index composed of the total U.S. investment-grade bond market. The other is the +Vanguard Total Bond Market Index Fund ETF Shares+ (BND ), which seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index. BNDI offers almost a 50/50 split for exposure between the two funds, giving investors that core exposure to supplement their equities portfolios.
Both funds are ideal options as opposed to creating a bond portfolio of debt from various corners of the market. Given the broad spectrum of bonds that both AGG and BND cover, investors can get exposure to public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international-dollar-denominated bonds, as well as mortgage-backed and asset-backed securities.
For more news, information, and analysis, visit the Tax Efficient Income Channel.
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