Aggregate bond ETFs aren’t delivering alarmingly negative performances, but there is some level of disappointment. Still, BNDI shows promise.
Pin the disappointment on the Federal Reserve and the war in Iran. The Fed has yet to lower interest rates and with oil prices and other inflationary indicators too high for comfort, consensus is emerging the central bank will lower rates just once this year – if that. Against this trying backdrop, the NEOS Enhanced Income Aggregate Bond ETF (BNDI ) may be an alternative for fixed income investors.
Indeed, BNDI, which turns four years old in August, delivers on the pledge of income as highlighted by a distribution yield of 5.78%, putting the actively managed well ahead of basic aggregate bond funds in terms of income-generating potential.
BNDI’s ability to generate income is fortified by not only holding two popular pure beta aggregate bond ETFs, but also by writing call options on the S&P 500 – an approach that isn’t common in the world of fixed income ETFs, but one that could serve investors well even when bond yields rise.
BNDI Right for These Times
Helped by active management and the aforementioned options overlay, BNDI may be an ally to fixed income investors as the Fed dithers on rate cuts, which is forcing yields higher leading to lower bond prices.
“The two-year is up 40 basis points year to date, or at least year to date through last Friday. We’ll see where they go today,” notes Morningstar’s Dave Sekera. “And to me, that also just kind of indicates that not only is the bond market really no longer pricing in a cut to the federal-funds rate, but that it’s now pricing in and actually a higher probability that the next move is going to be an increase to the federal-funds rate.”
Another reason to consider BNDI is weakness, albeit slight, in the domestic corporate bond market and that pertains to both investment-grade and junk issues. With BNDI offering a yield in excess of many investment-grade corporate bond ETFs and one comparable to many junk bond funds, investors may be able to mitigate risk with the NEOS fund.
BNDI also has the advantage of exposure that’s largely confined to domestic bonds, which is pertinent at a time when bond yields in some major European economies are flirting with the highest levels seen in three years.
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