The uncertain bond market is certainly affecting product preference across the board, including passive, income-focused exchange traded funds (ETFs). With rates rising and eroding bond income, passive funds may come out of favor, but that opens the door for active ETFs.
“This might reflect the negative impact of the current raging inflation environment on fixed-income assets,” a Pensions & Investments article noted regarding this year’s Trackinsight global exchange-traded fund survey. “As rates rise, traditional passive fixed-income ETFs become less attractive for investors, but the rise of actively managed fixed-income ETFs might help curb this trend.”
An Active, Multi-Income ETF to Consider
With a shift towards active ETFs, one such fund to consider is the American Century Multisector Income ETF (MUSI). The fund specifically hones in on seeking diversified exposures across investment-grade corporate, high yield, securitized, and emerging market bonds.
Of course, one of the prime features of active management is putting the capital allocation duties in the hands of professional portfolio managers. In this case, managers of MUSI rotate sector allocation depending on the global macroeconomic outlook combined with the relative valuation between sectors, making MUSI a dynamic option.
The sector allocation process takes into account inflation, economic activity, and monetary policy. The process incorporates fundamental research with quantitative modeling, offering the best of both worlds.
MUSI invests in both investment-grade corporate bonds and high yield bonds that offer more yield, but higher credit risk. As mentioned, income diversification is a strong focus of the fund given that it invests in preferred stock, convertible securities, bank loans, and other equivalents within equities.
Investing in securitized credit instruments allows for liquidity in times of market movement when speed and execution is crucial. In times when the U.S. Federal Reserve is aggressive with its rate hiking measures, investing in high yield bonds typically means shorter durations that are less affected by rising interest rates, as well as the ability to capture the call price of a company refinancing to lock in lower rates before rates rise further — this penalty is rolled into the returns for high yield bonds and equates to even greater returns for investors.
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