Last week, Rareview Capital LLC announced the launch of two innovative ETFs. The Rareview Dynamic Fixed Income ETF (RDFI) and the Rareview Tax Advantaged Income ETF (RTAI) seek to combine the traditional benefits of fixed income with the non-traditional advantages of closed-end funds.

RDFI is an actively managed ETF that seeks to generate high monthly income by investing in closed-end funds. RDFI is a comprehensive fixed income strategy where asset-class exposure is managed dynamically and driven by market opportunities. RDFI also implements a risk overlay process intending to protect the Fund in the event of a significant rise in volatility.

RTAI takes a similar active management approach to potentially deliver high monthly income but seeks to provide a tax-free equivalent yield by investing in municipal bond closed-end funds. RTAI’s strategy may prove attractive to investors in high tax brackets as the ETF offers income exempt from federal income taxes.

“With interest rates hovering near zero, fixed income investors have been put in a tough spot if they’re looking for high, consistent yield without taking undue risk,” said Neil Azous, Founder & CIO at Rareview Capital. “That’s why we’re thrilled to be launching RDFI and RTAI. Both ETFs seek to provide investors with consistent, high monthly income, even in the context of challenging market conditions.”

“Both of our new ETFs—RDFI and RTAI—seek to harness the potential of fixed income closed-end funds,” Azous said. “The advantages of closed-end funds, including the higher yield and the potential for alpha generation, may help an investor achieve their goals.”

Drawbacks and Appeals

When considering the drawbacks to the 60/40 portfolio for conservative and retiree investors that demand a high current income, Azous noted, “With interest rates near the Effective Lower Bound (ELB), the traditional cash bond markets may no longer achieve an income goal. Secondly, the reward-to-risk ratio for your principal is poor. For example, if the 10yr US Treasury yield were to fall to 0.00% from 0.60%, where it is currently, the positive total return would be no more than 5%.”

He continued, “Conversely, if the 10yr US Treasury yield increased to its long-run average, near 2.00%, a bondholder could lose up to 20% of the principal. That setup is very asymmetric against you. Therefore, with yields at the ELB, the traditional fixed income allocation is no longer the shock-absorber it once was.”

On the topic of the overlooked appeal of closed-end funds for yield-seeking investors, Azous explained, “Open-end mutual funds (OEFs) and ETFs garner more attention than closed-end funds (CEFs) despite the average yield in the CEF universe currently over 8%. This overlooked appeal stems from the CEF market being under-researched and primarily retail-owned. With interest rates at the Effective Lower Bound (ELB), we believe there will be a migration towards non-traditional investments, especially closed-end funds, because of their potential advantages.

Getting back to the newly launched funds, regarding the most popular use cases of RDFI & RTAI for retirees and tax conscious investors, Azous notes, “RTAI seeks to provide a tax-free equivalent yield by investing in municipal bond closed-end funds. RTAI’s strategy may prove attractive to investors in high tax brackets as the ETF offers income exempt from federal income taxes. We believe investors should consider replacing a portion of their core bond portfolio with RDFI and should implement that position in a retirement account to maximize the tax benefits.”

For additional information, see www.rareviewcapital.com.

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