Alternative fixed income ETF strategies for tough market conditions

Exchange-traded fund investors can look to the alternative income category to help them make the best risk-return trade-off to meet their income needs.

During the recent webcast, Enhance Your Fixed Income Portfolio with Rising Rate Strategies: Senior Loans and Debt Securities, George Goudelias, Head of Leveraged Finance, Senior Portfolio Manager, Seix Investment Advisors; Nicodemus Rinaldi, Senior Managing Director and Portfolio Manager, Securitized Products, Newfleet Asset Management; and James Jessup, Chief Product Officer, Virtus Investment Partners, argued that while markets may move quickly, investors’ need for stable income has not changed. Therefore, to maintain comfortable returns in an environment of rising interest rates and inflation, investors should consider out-of-the-box fixed income ideas such as Senior Loans or Securitized Debt.

More specifically, active management Virtus Seix Senior Loan ETF (NYSEArca:SEIX) offers discerning leveraged loan investors continuous fundamental credit risk management and increased liquidity in a transparent and cost-effective vehicle.

Senior Loans are typically used for corporate recapitalizations, acquisitions, leveraged buyouts and refinancing. Leveraged loans have offered the potential for higher income and lower correlations with other fixed income asset classes, and while they can potentially provide a hedge against rising interest rates, they have historically performed well during periods of stable interest rates.

The ETF is sub-advised by Seix Investment Advisors LLC, which will manage the investments in the portfolio. Seix seeks to generate competitive absolute and relative risk-adjusted returns over the entire market cycle through a conscious bottom-up and bottom-up process. Seix uses multidimensional approaches based on a strict portfolio construction methodology, sell disciplines and trading strategies with prudent risk management as a cornerstone. Their leveraged loan investment philosophy emphasizes BB and B rated loans, seeking to invest in the healthiest and most undervalued credits in the non-investment grade space.

“We believe the time is right to increase loan allocations due to improving market prices, favorable interest rates and seniority in the capital structure. The credit market continues to offer a yield premium (24bp as of April 11, 2022) to the high yield market and should benefit from a rising rate environment.It is important to note that the loans are primarily secured credit relative to the high yield market primarily unsecured. We believe that security provides a critical level of protection that makes the loan market particularly attractive in this phase of the investment cycle,” according to Virtus Funds and Seix Investment Advisors.

Moreover, the Virtus Newfleet ABS/MBS ETF (NYSE: VABS) can complement a traditional bond portfolio. The ABS (car loans, equipment leasing, credit card receivables, student loans, etc.) and MBS (mortgage, residential and commercial, agency and non-agency loan pools) sectors offer a broader set of investment opportunities and essential diversification from traditional fixed income securities. With a focus on off-benchmark niches in the securitized credit markets, Newfleet’s securitized credit specialists use their signature relative value approach, exploiting inefficiencies by continuously evaluating the market, sectors and securities.

VABS focuses on lower duration with attractive return opportunities. Targeting a duration of between one and three years, the duration of the ETF strategy is significantly shorter than traditional core bond strategies while focusing on investment-grade securitized credit, which has historically offered a yield advantage over traditional corporate bonds of similar rating.

“Given the safeguarding of rates, we can now reinvest short term principal repayments at higher yields and wider spreads. Our efforts are focused on the new issue markets which, at the time of this writing , continue to see strong demand for investment grade assets at new reset spread levels.Given the massive early curve move, we expect rates to stabilize in a range unless inflation gauges turn around. exceed expectations,” according to Virtus Funds and Newfleet Asset Management.

Financial advisors interested in learning more about fixed income strategies can watch the webcast here on demand

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