The markets have enjoyed a long bull run that has pushed up valuations, which also leaves many open to greater risks. Consequently, fixed-income investors may turn to an actively managed exchange traded fund to better manage potential pitfalls.
ETF Trends publisher Tom Lydon spoke with Todd Jablonski, Chief Investment Officer at Principal Financial Group, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk about what financial advisors should be thinking about today.
“What we see is one high valuations on a lot of risk assets, particularly equities and high-yield debt, and in particular, what we fear is evaluations threatened in what we are describing as a rich environment for policy error,” Jablonski said.
For instance, we are hearing a lot about health care reform, tax cuts, fiscal stimulus and monetary policy changes, but the markets are not getting a lot of clarity on many of these economy changing events.
Jablonski warned that many of these upcoming changes are made based on human decision, which also leaves us open to human policy errors. Consequently, investors are exposed to a pullback on risk asset prices.
“High-yield spreads are tighter than they have been over the last three years,” Jablonski said. “We believe that a more defensive in high yield is appropriate. In our ETF ticker YLD, we have essentially de-risked some of our income generating options there to prepare high yield investors for essentially what could be a troubling, potentially volatile 2017.”
The Principal EDGE Active Income ETF (NYSEArca: YLD) is an actively managed multi-asset fund. Multi-asset exchange traded funds have provided diversified exposure to a group of various asset classes and generated attractive yields and have become income investor favorites as advisors and investors searched for new yield sources amid several years of rock-bottom U.S. interest rates.
YLD seeks to generate consistent income through changing market environments and over market cycles. It invests opportunistically across a diversified range of income-generating asset classes while managing for risk. EDGE’s proven investment process, long history of income investing, and strong risk management and credit research capabilities may help enhance returns while reducing risks.
“We believe that active management works,” Jablonski said. “Despite the struggles that active have had, we think the key to long-term active success is having a long horizon. Therefore, we keep our turnover of YLD at less than twenty percent, which means each name, you have to be a five-year idea.”