IInvestors may consider exchange traded funds to help extract higher returns from a bond market that does not offer much return.
In the recent webcast, Active income management: a better approach, Jason Greenblath, Vice President, Senior Portfolio Manager, American Century Investments; and Sean Walker, vice president, ETF specialist, American Century Investments, described the current yield opportunities in the bond markets. For starters, many investors turned to the credit markets to generate more attractive returns.
However, credit spreads have fully retraced the 2020 widening and are close to historical pressures. Corporate credit spreads tightened by 11 basis points in 2Q 2021, driven by a rally in issuers and dislocated sectors from 2020. At the same time, financial firms outperformed, led by a takeover of business development companies and air leasing companies. On the other hand, sectors with low beta and tighter spreads have underperformed, such as utilities, telecoms and tech, which are highly rated and offer investors little spread compression.
Looking ahead, strategists have projected a positive trajectory for most issuers and sectors. Fundamentals such as deleveraging, reopening of trade, falling default rates and chip shortages could continue to support the outlook.
In this type of market, the tightening of spreads by any historical measure is very limited from here. Strategists believe that a strong investor appetite leaves the concession of new issues negligible and spreads are tight. In addition, the US yield advantage for foreign investors is expected to keep demand for US credit high in the short to medium term.
Investments in passive bond funds have helped investors achieve a three-decade bullish rally, but it will be more difficult in the environment ahead. Strategists argued that opportunities are scarce in passive bond strategies linked to Bloomberg Barclays Aggregate Bond indices, and that more attractive risk-reward opportunities can be found outside of more traditional benchmarks.
Passive index tracking strategies can expose investors to unforeseen risks, such as credit risk, sensitivity to interest rates, fluctuations in market value and a limited investment universe.
Alternatively, investors can consider something like active management American Century Multi-Sector Income ETF (MUSI), which is designed for investors looking for consistent income in a tax-efficient ETF. The management team aims for attractive returns throughout the market cycle while providing investors with access to a diverse set of securities opportunities, including investment grade companies, high yield companies, debt securities. emerging markets and securitized bonds.
Sector allocation decisions are based on global macroeconomic outlook, historical spreads and cross-sector valuations and are informed by global macro strategy and the opinions of American Century’s team of sector specialists. Security selection is led by long-time industry specialists who apply bottom-up fundamental analysis to assess relative worth and creditworthiness.
“Ongoing and active risk management is a key part of our investment philosophy,” according to American Century.
In addition, active management American Century Diversified Corporate Bond ETF (NYSEArca: KORP) seeks current income with an emphasis on quality debt while dynamically allocating a portion of the portfolio to high yield. KORP adjusts the investment grade and high yield components to balance interest rate risk and credit risk. The strategy selects individual credits to seek those with strong fundamentals, reduced default risk, attractive valuations and liquidity.
The ETF adjusts sector and duration exposures as risks and opportunities arise. Up to 35% of the fund’s net assets may be invested in high yield securities or junk bonds. The fund may also invest in derivative instruments such as forward contracts and swap agreements. The weighted average portfolio duration of the fund is expected to be between three and seven years.
“The ideas in the portfolio are alpha-generating stocks (i.e. rising stars, poorly valued against our internal views) that we believe offer better risk-adjusted returns,” according to American Century.
Financial advisors who want to learn more about ideas that generate returns can watch the webcast here on request.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.