Exchange traded fund investors looking to craft a well-diversified investment portfolio should consider various income strategies in an evolving market environment.
In the recent webcast, Building Durable Income for Today’s Markets, Brian Griggs, Vice President, Solutions Specialist, Nuveen, highlighted the copious amount of both fiscal and monetary stimulus measures that have inundated the market, with the global total at $25.3 trillion or 29.2% of the world gross domestic product. Looking ahead, Briggs predicts that the Federal Reserve will maintain its near-zero interest rate policy until unemployment and inflation reach their long-term targets, which may take a while.
Consequently, government bond yields remain depressed in this lower-for-longer rate environment. Griggs warned that lower starting yields will likely mean lower expected returns for fixed income. Historically, starting yield-to-worst has explained 81% or a correlation 0.9 of the variation in subsequent 5-year returns for the Barclays U.S. Aggregate Index. Investors may also notice that they are receiving less compensation for rate sensitivity as the ratio of duration to yield for a passive core bond allocation has never been higher.
Nevertheless, Griggs argued that the credit sector yields remain attractive. Higher quality non-Treasury sectors within the U.S. Aggregate Index offer limited returns with lower risk potential. Investors, though, need to be selective in their security selection at this stage, making active management important in this type of environment. Multi-sector strategies also offer the opportunity to balance stability with income.
As a way to help investors gain diversified exposure to the broad fixed-income market, Margaret Leung, Head of Specialist Distribution, Nuveen, highlighted the Nuveen Enhanced Yield 1-5 Year U.S. Aggregate Bond ETF (NYSEArca: NUSA) and the Nuveen Enhanced Yield U.S. Aggregate Bond ETF (NYSEArca: NUAG). Both are Strategic Beta or rules-based ETF strategies that try to enhance yield while keeping risk and credit quality near that of the broad U.S. investment-grade fixed income market.
Leung pointed out that these enhanced yield ETF strategies focus on what’s important for long-term returns: yields. Income has dominated total return over time, contributing to 93.0% of investment-grade bond returns and 94.2% of high-yield bond returns.
Leung also emphasized the growing demand for ESG factor investments, notably among fixed-income investors. ESG factors provide an additional lens to assess company/issuer performance that may enhance long-term value or manage downside risk. As a way to help investors capture this core investment theme, Nuveen has come out with the Nuveen ESG U.S. Aggregate Bond ETF (NYSEArca: NUBD) and the Nuveen ESG High Yield Corporate Bond ETF (NUHY) to pair traditional bond investment needs with environmental, social, and governance, or ESG, principles. The strategies can increase exposure to securities with higher ESG scores, reduce carbon footprint through distinct low carbon criteria, and provide the risk/return characteristics of traditional non-ESG exposures.
Financial advisors who are interested in learning more about fixed-income strategies can watch the webcast here on demand.