After months of back and forth over inflation data and not a little media and political pressure, the Fed may be very close to a September rate cut. Fed Chair Jerome Powell dropped the latest signal that such a cut may be happening to close out August. Looking ahead, then, the time may be now for investors to adjust their debt allocations. Especially amid some broader economic uncertainty, current income strategies can help. One active income ETF in particular, FSEC, has the potential to do well even if falling rates cut into yields.
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The Fidelity Investment Grade Securitized ETF (FSEC) could zig where other current income approaches zag, thanks to its focus on securitized assets. Should traditional corporate and government bonds see weaker yields in a falling rate environment following a cut, FSEC’s securitized assets could make for a worthy alternative.
How, then, does the strategy approach the space? FSEC charges a 36 basis point fee to actively invest in its targeted areas. Its managers look to offer current income to its investors via securitized debt of any maturity from government and non-government issuers. Specifically, FSEC invests in asset-backed securities, residential and commercial mortgage-backed securities, and repurchase agreements for such securities. What’s more, its managers scrutinize issuers for factors like credit quality, security-specific features, and valuations.
Together, that has helped the active income ETF provide a 4.4% 30-day SEC yield as of August 21. Its distribution yield has come in at 3.1%, too, with July 30 the most recent distribution date at publishing time. The ETF itself has returned 5% YTD for investors, per ETF Database. That outperformed both its ETF Database Category and FactSet Segment averages in that time frame.
With bond yield uncertainty rising ahead of at least one rate cut, investors have a wide array of options. Securitized assets and their diversification away from traditional bonds could help investors, however. By adding an active management wrinkle, FSEC can identify the best opportunities in the category, as well. The active income ETF, then, may merit a closer look from those wanting to refresh portfolios as the year begins to wind down.
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Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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