The Federal Reserve’s benchmark lending rate is at historic lows, but 10-year Treasury yields are rising. In other words, the going is rough for advisors looking to generate income for clients.
That’s a reminder that many of the traditional backstops of income investing are facing challenges today. Alternative income strategies can ameliorate that scenario, and WisdomTree is stepping to the plate with the newly minted WisdomTree Alternative Income Fund (HYIN).
See also: WisdomTree Launches New Alternative Income Fund, ‘HYIN’
HYIN is a new exchange traded fund, but it could ultimately prove to be one of this year’s better-timed launches because it delivers on the promise of elevated income in a low yield world.
“Alternative credit consists of debt and debt-based securities that have a higher risk-return profile than traditional high-yield bonds,” said WisdomTree head of fixed income Kevin Flanagan in a note. “Historically, this investment space has been primarily limited to institutional or ultra high net worth investors through private fund instruments. However, publicly traded alternative credit vehicles (PACs) offer another way of access for a wide range of alternative credit sectors on an intra-day basis.”
Whether they know it or not, plenty of experienced income investors are already familiar with the concept of PACs because the group includes favored income assets such as business development companies (BDCs), closed-end funds (CEFs), and real estate investment trusts (REITs).
BDCs lend to small- and mid-sized businesses that typically can’t access traditional corporate debt sales. The asset class is known for high yields, but it’s not exceptionally sensitive to higher interest rates – a relevant consideration today – because of its floating rate component.
“Against the backdrop of low yields in areas such as Treasuries, corporate bonds and equities, investors could consider using the newly launched HYIN, which seeks to track the price and yield performance, before fees and expenses, of the Gapstow Liquid Alternative Credit Index (GLACI), as a complement to their fixed income holdings,” adds Flanagan. “This strategy currently offers considerable yield advantages compared to a variety of both equity and fixed income classes and provides a moderate to low correlation to equity and fixed income markets.”
As for yield, HYIN is likely to deliver on that front as its underlying index yields 8.72%. That’s more than double what investors will find on a widely followed gauge of high yield corporate bonds.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.