The capital markets have been filled with fears of inverted yield curves, but global governments willing to put forth stimulus packages to prop up their respective economies could ease the pressure on U.S. Treasury yields. China recently revealed rate cut programs ahead, which could be a sign that world economies are being put on notice that recession fears are real.
Of course, those rate cut programs come after the U.S. implemented its own 25-basis point cut recently. Aside from the two biggest economies, Germany is also looking to implement similar cuts, which could put investors on notice that adjusting their portfolios may be necessary if this becomes a worldwide trend.
“You have just got a little bit of portfolio readjustment, a resetting of expectations. The big question is whether it can last,” said Michael Hewson, chief market strategist at CMC Markets. “Talking about fiscal stimulus in Germany is one thing, doing it is something else.”
The Federal Reserve has been putting its more dovish side on display, which pivots from 2018’s rate-hiking bonanza. In addition, fixed income investors are facing other challenges like inverted yield curves and signs of slowing global growth.
Given these challenges, how do investors approach the bond markets? One of the ways is via actively-managed bond ETFs like the Virtus Seix Senior Loan ETF (NYSEArca: SEIX) and Principal Ultra-Short Active Income ETF (NYSEArca: USI).
SEIX seeks to provide investors with a high level of current income via first- and second-lien senior floating rate loans. Senior loans are typically used for business recapitalizations, acquisitions, leveraged buyouts, and re-financings.
The inherent risks associated with senior loans are similar to the risks of junk bonds, but have seniority in the event of borrower default so if the business is forced to sell its assets in a liquidation scenario, the senior loan will be paid first. In addition, senior loans are secured by assets whereas junk bonds are not, making them a more attractive investment option when constructing a loan portfolio.
SEIX will invest in loans that contain possess floating coupon rates tied to a benchmark lending rate, and are below investment grade or unrated. The floating rate allows investors to capitalize on any short-term interest rate adjustments.
SEIX will be subadvised by Seix Investment Advisors LLC, which will manage investments for the portfolio with a management fee of 0.57 percent.
USI may hold a mix of fixed and floating rate securities in U.S. and foreign debt from the financial services sector, such as banking, insurance and commercial finance. USI will be managed by Principal Global Advisors–an indirect subsidiary of Principal Financial Group with a cost-effective fee of 0.18 percent.
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