Alternative ETF Strategies to Bolster Your Income Portfolio | ETF Trends

In a lower-for-longer yield environment, exchange traded fund investors can turn to non-traditional sources of income to bolster their fixed income portfolios.

In the recent webcast, Income for a Better Outcome: Where to Invest in Non-Traditional Income, Jay D. Hatfield, CIO & portfolio manager at InfraCap Capital Advisors; George Goudelias, head of leveraged finance & senior portfolio manager at Seix Investment Advisors; and James Jessup, product manager at Virtus Investment Partners, highlighted four ETF strategies off the beaten path to allow income-minded investors to diversify beyond a traditional portfolio mix.

For starters, the actively managed Virtus InfraCap U.S. Preferred Stock ETF (NYSEArca: PFFA) offers the potential for attractive yields while pursuing compelling total return results. The active management team takes security selection and weightings based on a variety of quantitative, qualitative, and relative valuation factors. Additionally, a modest leverage — typically 20% to 30% — is utilized to enhance portfolio beta, and options strategies are used in an effort to enhance current income.

Preferred stocks are a class of equity security that typically pays fixed or floating dividends to investors and has “preference” over common stocks. However, preferred stocks are subordinated to bonds. The issuing company must pay dividends to preferred stockholders before common stockholders, and, in the event of a bankruptcy or liquidation of the company’s assets, must put the claims of the preferred stockholders ahead of the claims of the common stockholders. Additionally, preferred stocks issue dividends on a regular basis, but investors don’t usually enjoy capital appreciation on par with common shares.

The InfraCap REIT Preferred ETF (NYSEArca: PFFR) is the only ETF offering a diversified investment in preferred securities issued by Real Estate Investment Trusts (REITs). REIT preferreds tend to offer attractive yield potential, both fixed income and equity characteristics, and low equity beta. Compared to traditional preferreds, these securities are also typically exposed to less leverage with generally more predictable revenue streams than those issued by banks and insurance companies.

The actively managed Virtus Seix Senior Loan ETF (NYSEArca: SEIX) provides discerning leveraged loan investors with ongoing fundamental credit risk management and enhanced liquidity in a transparent and cost-effective vehicle.

Senior loans are typically used for business recapitalizations, acquisitions, leveraged buyouts, and re-financing. Leveraged loans have offered the potential for higher income and lower correlations to other fixed income asset classes, and, though they may potentially provide a hedge against rising interest rates, they have historically performed well in periods with stable interest rates.

The ETF is sub-advised by Seix Investment Advisors LLC, which will manage investments for the portfolio. Seix seeks to generate competitive absolute and relative risk-adjusted returns over the full market cycle through a bottom-up focused, top-down aware process. Seix employs multi-dimensional approaches based on strict portfolio construction methodology, sell disciplines, and trading strategies with prudent risk management as a cornerstone. Their leveraged loan investment philosophy emphasizes BB- and B-rated loans, seeking to invest in the healthiest and most undervalued credits in the non-investment-grade space.

Lastly, the Virtus Newfleet ABS/MBS ETF (NYSE: VABS) can complement a traditional fixed income portfolio. The ABS (auto loans, equipment leases, credit card receivables, student loans, etc.) and MBS (pools of mortgages, both residential and commercial, agency and non-agency) sectors provide a wider investment opportunity set and much needed diversification relative to traditional fixed income. With an emphasis on the out-of-index, niche areas of the securitized credit markets, Newfleet’s securitized credit specialists employ their hallmark relative value approach, exploiting inefficiencies by continuously evaluating the market, sectors, and securities.

VABS also targets a duration of between one and three years, significantly shorter than traditional core bond strategies, while focusing on investment-grade securitized credit, which has historically offered a yield advantage over similarly rated traditional corporate bonds.

Financial advisors who are interested in learning more about non-traditional income strategies can watch the webcast here on demand.