As we consider the current outlook for inflation and the Federal Reserve’s monetary policy, bond investors can turn to actively managed core fixed income ETFs that seek to generate real income and positive alpha for their portfolios.
In the recent webcast, How to Navigate the Current Market Environment with Active Fixed Income ETFs, Meera Pandit, global market strategist at J.P. Morgan Asset Management, and John Ecklund, managing director and head of the fixed income portfolio strategists at J.P. Morgan Asset Management, argued that while we traverse the hurdles in the current market environment, investors are still in need of reliable, yield-generating investments and ETFs that can adapt to the ongoing risks.
The strategists noted that the U.S. economy remains stable, although it is slowing down after a rapid expansion. The third quarter 2022 real gross domestic product was still 1.8% higher year-over-year, but it was down from its high of 5.7% back in the fourth quarter of 2021. Meanwhile, economic indicators like real personal income less transfers, nonfarm payroll employment, household survey employment, real consumer spending, and industrial production remain positive over the last six months. Civilian unemployment rates were down to 3.7% compared to the 50-year average of 6.2%, while wage growth was 5.5%, compared to the historical average of 4.0%.
Meanwhile, the strategists pointed out that the inflation that neared a four-decade high may have peaked, as headline CPI dipped to 7.8% in October, compared to 8.2% in September. Goods prices are showing signs of moderation as supply chain pressures ease. While some commodities have sold off, energy and food prices remain elevated.
In response to the elevated inflationary environment, the Fed has aggressively hiked interest rates, with many expecting the rate hike cycle to peak sometime next year. However, the rate hikes have contributed to a dramatic impact on yields across the board. Consequently, the strategists argued that valuations have reset and income is back in bonds.
As a result, the J.P. Morgan strategists advised investors to turn to short-dated credit with high quality cashflows that offer a cushion against the rising interest rate environment. Specifically, they argued that securitized credit valuations look compelling at current levels.
To help investors tackle the bond market in today’s conditions, the strategists highlighted the JPMorgan Core Plus Bond ETF (JCPB), which tries to generate a high level of income by investing in high-, medium-, and low-grade debt securities. JCPB tries to outperform the Bloomberg US Aggregate through the typical market cycle and seeks to limit downside deviation vs benchmark.
The strategy implements a top-down macro overlay where portfolio managers actively allocate across sectors and apply dynamic macro overlay to ensure portfolio retains desired risk characteristics. The strategy seeks to generate an information advantage and access to a wider opportunity set.
The ETF also executes a bottom-up security selection process, where the portfolio managers utilize specialist teams running dedicated sector strategies for security recommendations. Security selection benefits from the same alpha generating processes and proprietary research applied in dedicated sector strategies.
In addition, the JPMorgan Income ETF (JPIE) is one of the active fixed income ETFs that targets debt securities across the fixed income space, seeking to deliver yield with lower volatility and attractive distributions. The strategists underscored JPIE’s key features, such as the maximum possible income for a given prudent level of risk, income paid in predictable dividends, and a diversified global portfolio combined with an income filter.
JPIE draws upon the combined expertise of the firm’s Global Fixed Income Currency and Commodities (GFICC) platform, providing the best ideas from diverse asset class expertise and broad investment capabilities. Consequently, the strategy invests opportunistically in a wide variety of debt securities that have a high potential to produce attractive risk-adjusted income and have low correlations to each other. The fund utilizes a flexible approach, allowing allocation shifts based on changing market conditions. In addition, investors can find attractive dividend payouts every month.
Financial advisors who are interested in learning more about active fixed-income strategies can watch the webcast here on demand.