Income-Generating ETF Strategies for a Changing Market

“Senior loans have historically outperformed high yield bonds when credit spreads widened, and may offer rising levels of income as their coupons begin to adjust with LIBOR, which is now over 100 basis points — the floor of 99% of the loans held in SRLN,” Bartolini said.

Additionally, the SPDR Barclays Investment Grade Floating Rate (NYSEArca: FLRN) focuses in investment-grade debt that implement a floating-rate component.

“Investment grade floating rate notes may provide some yield, but with a lower duration risk than fixed rate exposures — a potential benefit in a rising rate environment where duration induced price declines may wipe out any return from the coupon,” Bartolini said.

Bryan Novak, Senior Managing Director of Astor Investment Management, also argued that investors can combine non-correlating assets to mitigate risk in an income-focused portfolio.

“Investing in income streams across the capital structure can add significant value to a portfolio through changing the risk profile of the portfolio and sensitivity to any one specific risk event,” Novak said.

Given the current macro environment, Novak advised investors should look to short duration and positive credit, including options like SRLN as a high-yield option with a floating-rate component and the SPDR Barclays Short Term High Yield Bond ETF (NYSEArca: SJNK) for a lower duration avenue to high-yield corporates without a significant sacrifice in terms of yield.

Mike Dickson, Director of Structured Financial Solutions at Horizon Investments, also contends that investors should consider corporate credit and high-yield over everything else and shorter duration over long duration exposure.

For example, Dickson also pointed out that Horizon is overweight options like TOTL and SJNK.

Additionally, Dickson also suggested overweighting dividend stocks as a way to provide strong value, defensive and quality tilts. For example, the SPDR S&P 500 High Dividend ETF (NYSEArca: SPYD) takes the top 80 dividend-paying securities listed on the S&P 500 Index, based on dividend yield.  The SPDR S&P Dividend ETF (NYSEArca: SDY) holds firms that have a minimum dividend increase streak of 20 years for inclusion and follows a yield-weighting methodology that allocates a larger weight toward those with higher yields, so the portfolio leans toward more mid-sized companies.

Financial advisors who are interested in learning more about fixed-income strategies in the current market environment can watch the webcast here on demand.