The capital markets are already pricing in rate cuts ahead of 2024, causing yields to fall. One way to continue supplementing income amid a potential drop in yields is to diversify income using a pair of active exchange-traded funds.
The first half of the new year is causing optimism that rates will finally fall and the higher-for-longer interest rates narrative dissipates. Signs of inflation and economic growth receding is applying downward pressure on yields, which is pushing bond prices higher.
“The Fed is on hold, and (this report) gives them more comfort in staying on hold. What they’re doing is working,” said Robert Pavlik, Dakota Wealth Management senior portfolio manager, via a Reuters report.
“The data is trending in the direction that the Fed wants to see,” he added, noting that a “25- to 50 basis-point cut before the end of the summer 2024 would make sense as the economy slows down, for the Fed to fine tune how their policy tools are working.”
Income Diversification Options
Fixed income investors who rely on bonds for income may want to supplement their exposure with an active ETF that seeks diversified income. One option is the American Century Multisector Floating Income ETF (FUSI), which is primarily composed of floating rate Treasury notes.
For those who want to maintain the safety of government debt, but also want other avenues for yield, FUSI is worth considering. The fund adds other sources for yield such as mortgage-backed securities and collateralized loan obligations. As a result of this multisector approach to yield, its 30-day SEC yield is 6.39% as of November 30, and its 12-month distribution rate is 6.62%.
Underpinning the fund’s strategy is active management, which comes at only a 0.27% expense ratio. An actively managed fund like FUSI allows its portfolio managers to maintain pliability in the market. This allows for adjustments to the fund’s core holdings when market conditions suggest changes are necessary.
Another active option for yield seekers is the American Century Multisector Income ETF (MUSI), which pursues attractive income and total return by balancing interest rate and credit risk in a portfolio that spans investment-grade, high yield, securitized, and emerging market debt securities. That exposure to EM debt adds an additional component of diversification for more income sources. As of November 30, MUSI has a 30-day SEC yield of 5.88%, while its 12-month distribution rate stands at 5.33%.
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