Is now the time for adding some more income to portfolios? Investors are facing growing uncertainty as a higher for longer interest rate regime appears more likely than ever. That one-two punch of higher interest rates and inflation may be throwing a wrench in investors’ plans, particularly those nearing retirement. Recognizing that situation, many investors may be considering options from the world of current income ETFs.
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Strategies that provide current income, especially in an ETF wrapper, can combine ETFs’ advantages with that standard income. One particular pair of current income ETFs, EVLN, and EVHY, could appeal.
The Eaton Vance Floating Rate ETF (EVLN) launched just this year, but has already gathered almost $800 million in AUM. EVLN actively invests, seeking high income by investing in sub-investment grade floating-rate loans and corporate debts.
EVLN looks at debt instruments like CLO debt tranches and senior loans. The ETF looks at issuers’ financial health, operating history, management capacity, and cash flow. It mostly looks for high yield securities. The strategy has returned 9.5% since inception per Morgan Stanley Investment Management data. For a 60 basis point (bps) fee, its net investment income per share was $0.371507 per MSIM data as of the start of April.
Meanwhile, the Eaton Vance High Yield ETF (EVHY) offers a slightly different view. While EVLN has the flexibility to lean into high yield, EVHY focuses on U.S. corporate high yield debt pretty specifically. EVHY limits no more than 10% of assets for debt instruments rated below B3. EVHY charges 48 bps and most recently offered a $0.308021 per share distribution.
The pair of current income ETFs combine active and ETF benefits. An active approach to fixed income can often outperform passive fixed income thanks to the additional scrutiny active managers provide. Meanwhile, an ETF wrapper provides the transparency and tax benefits that can add up.
Taken together, the current income ETFs’ adaptability and ability to add current income can boost portfolios. For those nearing retirement especially, they could prove worthwhile adds on top of a core fixed income allocation.
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