Actively Balance Yield and Credit Risk With This ETF

With 2023 in the books, fixed income investors may be looking at corporate bonds for added yield. They will also need to balance the need for yield with mitigating credit risk given the market uncertainty in the new year.

With the expectation that the Federal Reserve would be cutting interest rates in 2024, investors were already allocating capital to corporate bonds at a feverish pace in the past few months. Rates are projected to fall in the new year. But corporate bonds should still offer more yield versus safer debt.

“Investors are pouring cash into US corporate bond funds at the fastest pace in more than three years, signaling a growing appetite for risky assets as markets call the peak in interest rates,” a Financial Times report said about a month ago.

Yes, there are heavier inflows into corporate bonds. But fixed income investors shouldn’t dive into the corporate bond markets blindly to snatch yields while they remain elevated. This is where an active management strategy can help investors navigate the vast bond markets replete with a plethora of opportunities.

Using Information Embedded in Current Yield

While there’s a dose of market uncertainty fixed income investors still need to account for in the new year, that flexibility is inherent in active ETFs. One to consider is the the Avantis Core Fixed Income ETF (AVIG). It offers core exposure, adding diversification to a bond portfolio via a low 0.15% expense ratio.

To help maintain pliability in the current macroeconomic environment, AVIG’s active management strategy is ideal. This puts the debt holdings in the hands of investment professionals rather than individual investors or advisors hand-picking the bond holdings themselves.

AVIG offers a 30-day SEC yield of 4.76% as of 12/29/23, while adding diversification in holdings of mostly investment-grade quality with an average duration of six years. Per its product website, AVIG summarily provides the following:

  • Diversified exposure to a broad set of debt obligations across sectors, maturities, and issuers.

  • Pursuit of benefits associated with indexing such as diversification and transparency of exposures, but with the ability to add value by making investment decisions using information embedded in current yields.

  • Implementation of an efficient portfolio management and trading process designed to enhance returns while seeking to reduce unnecessary risks and transaction costs.

  • A fixed income ETF option that can fit seamlessly into an investor’s asset allocation

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