Exchange traded fund investors can look to the alternative income category to help make the best risk return trade-off to meet their income needs.
In the recent webcast, Enhance Your Fixed Income Portfolio with Rising Rate Strategies: Senior Loans and Securitized Debt, George Goudelias, Head of Leveraged Finance, Senior Portfolio Manager, Seix Investment Advisors; Nicodemus Rinaldi, Senior Managing Director and Portfolio Manager, Securitized Products, Newfleet Asset Management; and James Jessup, Product Manager, Virtus Investment Partners, argued that while markets might be shifting rapidly, investors’ need for steady income hasn’t changed. Consequently, to maintain comfortable yields in an environment of rising interest rates and inflation, investors should consider out-of-the-box fixed income ideas, such as senior loans or securitized debt.
Specifically, 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.
“We believe now is a good time to increase allocations to loans owing to improved market pricing, favorable interest rate tailwinds, and seniority in the capital structure. The loan market continues to offer a yield premium (24 bps on April 11, 2022) to the high yield market and stands to benefit from a rising rate environment. Importantly, loans are primarily secured credit versus the primarily unsecured high-yield market. We believe security provides a critical level of protection that makes the loan market especially attractive in this phase of the investment cycle,” according to Virtus Funds and Seix Investment Advisors.
Additionally, 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 focuses on a lower duration with attractive yield opportunities. Targeting a duration of between one to three years, the ETF strategy’s duration is 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.
“Given the rate back-up, we can now reinvest short duration principal paydowns at higher yields and wider spreads. Our efforts are focused on the new issue markets, which, as of this writing, continue to see strong demand for investment-grade assets at the new reset spread levels. Given the massive move in the front end of the curve, we expect rates to settle in a range unless inflation gauges exceed expectations,” according to Virtus Funds and Newfleet Asset Management.
Financial advisors who are interested in learning more about fixed-income strategies can watch the webcast here on demand