To say 2018 was an interesting year for fixed income investors is probably an understatement. Even as the Federal Reserve boosted interest rates four times, advisors and investors flocked to fixed income exchange traded funds.
By the time 2018 ended, bond ETFs accounted for nearly a third of all inflows to US-listed ETFs, with a hefty percentage of that capital heading to low and ultra-low duration funds.
While some fixed income market observers believe the Fed will slow its pace of rate hikes this year and some believe there will not be any rate increases at all, the new year brings new challenges and opportunities for bond ETF investors.
Bryan Novak, senior managing director at Chicago-based Astor Investment Management, LLC, recently discussed the firm’s Active Income strategy and opportunities for fixed income investors in 2019 with ETF Trends.
Inside Active Income
Astor’s Active Income uses a fundamental approach to fixed income investing, seeking attractive yield-to-risk ratios relative to intermediate-term Treasuries. At the end of 2018, average credit quality in the strategy was high at A- while duration was low at an average of 1.64 years, according to Astor data.
“Active Income is an unconstrained income-focused strategy that essentially seeks to find the optimal allocation across yield producing assets given the current environment,” said Novak. “You might say it tries to push the balance of yield for the risk in the investors favor. Yield is always there in some way, but the risks for that yield are not always in the investors favor.”
While Active Income is not a yield-focused strategy, it did sport a tidy yield of 4.24 percent at the end of last year, providing a high yield than 10-year Treasuries or the widely followed Bloomberg Barclays US Aggregate Bond Index.
“The strategy does not seek to make bets on where the best yield is, but rather takes a lower vol approach by diversifying across asset classes,” said Novak. “The strategy has done well to compliment core diversified bond portfolios that investors typically use, such as Bloomberg Barclays Aggregate Bond Index or other traditional fixed income exposure.
Astor Active Income has flexibility across fixed income segments. For instance, when allocating to investment-grade corporate bonds, the strategy can include ETFs such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA: LQD) and the actively managed iShares Short Maturity Bond ETF (CBOE: NEAR). NEAR has an effective duration of just 0.48 years.
The strategy can also feature high-yield corporate bond exposure via traditional ETFs or via senior loans and funds such as the SPDR Blackstone / GSO Senior Loan ETF (NYSEARCA: SRLN).