With the Federal Reserve likely to hike interest rates ahead, yield-seeking investors have a number of fixed-income exchange traded fund options to help diversify a portfolio and still generate attractive payouts.

On the recent webcast (available on-demand for CE Credit), Tactical Income Strategies for the Modern Advisor, Matthew Bartolini, Vice President and Head of SPDR Americas Research at State Street Global Advisors, warned that investors have to contend with the potential Federal Reserve rate hikes and political uncertainty, which will affect many people’s ability construct a diversified and stable fixed-income portfolio with adequate yield generating potential.

While bond yields have dipped post-election, the fixed-income market has also been in a bull market for nearly four decades. Investors should not expect the good times to last, with bond volatility whip sawing for almost two years in anticipation of a rising rate environment.

Many have turned to the benchmark Barclays U.S. Aggregate Bond Index as a proxy for their fixed-income allocations, but Bartolini warned that exposure to the so-called Agg may now prove riskier than before. After the extended bull run in the debt market, the Agg has developed an undesirable risk/reward trade-off.

“The Bloomberg Barclays US Aggregate Index is approximately 70% allocated to interest rate sensitive sectors, and since the financial crisis the exposure is more concentrated in Treasuries and US corporate bonds,” Bartolini said.

Alternatively, Bartolini argued that investors should consider active or passive fixed-income strategies and floating-rate debt over fixed debt to help target better total returns in a higher rate, cyclical environment while achieving balance in a bond portfolio and align income with risks.

For example, the SPDR DoubleLine Total Return Tactical ETF (NYSEArca: TOTL) has been a popular active bond play for ETF investors. TOTL is an actively managed ETF backed by bond guru Jeff Gundlach and is also seen as an ETF adaptation of the flagship DoubleLine Total Return Fund (DLTNX).

“With TOTL, investors may rely on DoubleLine Capital’s experience to navigate today’s changing fixed income markets by allocating across multiple bond subsectors and applying individual security selection to potentially deliver improved risk-adjusted returns,” Bartolini said.

The actively managed SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) provides exposure to senior secured floating rate bank loans.

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