With yields rising in the current high-rate environment, there’s a plethora of opportunities to take advantage of in corporate bonds. One worth considering is the actively managed American Century Diversified Corporate Bond ETF (KORP).
While higher yields may make corporate bonds more attractive, some investors aren’t willing to take on the additional credit risk. However, in certain cases, corporate bonds can offer higher credit quality versus safer haven government debt issues.
“Some of the corporates got higher quality than the U.S. government [bonds]right now,” said JPMorgan’s Bryon Lake.
Right now, the U.S. Federal Reserve is pushing a higher-for-longer narrative that runs counter to what most were expecting this year, which was eventual rate cuts. Nonetheless, the high-rate environment should continue to provide opportunities for corporate bonds.
“As long as you’re in this higher-for-longer environment, this is candy — especially after not having it for 10-plus years during the QE [quantitative easing]era. You now just put a bowl of M&Ms in front of a child and can get that 5% … . That’s the analogy I like to use,” said Strategas Securities’ Todd Sohn.
However, it’s easy to get tunnel vision with the higher yields corporate bonds can offer. That said, also consider shorter duration especially when the U.S. Federal Reserve is battling against inflation that’s been more stubborn than they initially anticipated.
“Duration makes sense when the [Federal Reserve] is done hiking in anticipation of cuts,” Sohn said. “But if no cuts are coming, I don’t think you want that volatility. It’s not fun to sit in.”
An Active Option on Corporate Bonds
To stay pliable in the current macroeconomic environment, KORP’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.
KORP offers yield while also adding diversification in holdings of mostly investment-grade quality. Per its fund description, it seeks current income by emphasizing investment-grade debt while dynamically allocating a portion of the portfolio to high yield.
Per its product website, KORP creates a systematically managed portfolio that integrates fundamental and quantitative expertise that:
- Adjusts investment-grade and high yield components to balance interest rate and credit risk.
- Screens individual credits to seek those with sound fundamentals, reduced default risk, attractive valuations, and liquidity.
- Adjusts industry and duration exposures as risks and opportunities emerge.
- Offers cost effectiveness with a relatively low 0.29% expense ratio.
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