Bond traders are upping the ante when it comes to bullish bets, but with rates and subsequently yields expected to fall, fixed income investors can supplement bond income with the Parametric Equity Premium Income ETF (PAPI).
Since bond prices move inversely with yields, the expectation of rate cuts could feed into bond-buying frenzy. Trading activity in the bond market is already reflecting as much.
“Bond traders loaded back up on interest-rate-cut bets — and even the pushback coming out of the Federal Reserve did little to shake their conviction,” reported Bloomberg, noting that the Fed is continuing to exercise patience and wait for more economic data that will signal the need for rate cuts.
PAPI is an active fund that harnesses Parametric capabilities. This results in systematic dividend income as well as rules-based call selling for even more yield. Speaking of which, with a distribution yield of 8.37% (as of May 31), it’s certainly a fund worth looking at for fixed income investors looking to supplement a portfolio that consists mainly of bonds. The expectation of rate cuts is fueling bullish bets on bond prices, but in turn, it would bring down yields so PAPI could serve as an ideal income hedging solution.
Furthermore, because its holdings consist of equities, they’re not subject to lower interest rates pushing yields lower like bonds. That also adds a price appreciation component so if equities trend higher, PAPI is also able to capture that upside along with income.
Under the hood of PAPI are dividend-paying equities from the Russell 3000. Its discerning screener utilizes a top-down, systematic approach. Companies that demonstrate 12 months of high current income and reduced risk within their sectors. Additionally, the fund adds diversification, spanning across a variety of sectors while also mitigating concentration risk. Its top holding only occupies 1.15% of the fund’s assets.
Pliability in an Uncertain Market
One of the prime benefits of PAPI is its active management component. It takes advantage of a deep talent pool of portfolio managers that can deftly navigate the markets. It’s almost imperative to get expert portfolio management these days given the market uncertainty, especially in the second half of 2024, which could see increased volatility with the presidential election forthcoming.
To that end, the capability to adjust holdings if portfolio changes are necessary speaks to the pliability of PAPI. Furthermore, investors can get exposure to this active fund with a very competitive expense ratio of just 0.29%. In a time of still relatively high interest rates, the low expense ratio is beneficial to cost-conscious investors.
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