Hone in on HYIN for Alternative Income | ETF Trends

While the Federal Reserve is likely to soon raise interest rates, those rates are still low by historical standards, and even when rate hikes arrive, government bond yields will remain low on an absolute basis.

In other words, advisors are still scrambling to source yield for income-starved clients. With that in mind, it’s an appropriate time to consider alternative sources of income — an approach that’s available in broad form via the WisdomTree Alternative Income Fund (HYIN).

HYIN, which tracks the Gapstow Liquid Alternative Credit Index, debuted last May and is a yield-lover’s dream come true as highlighted by a jaw-dropping 30-day SEC yield of 8.66%, according to issuer data. The cornerstone of HYIN’s income-generating capabilities is what’s known as alternative. For investors not familiar with that concept, it’s easily understood.

“It is debt-based instruments whose yield and/or expected return is higher than investment-grade fixed income securities,” says WisdomTree head of fixed income strategy Kevin Flanagan. “It includes a range of securities across a broad universe of borrower segments, such as households, corporations and commercial real estate. Three main segments of alternative credit are business development companies (BDCs), credit-centric closed-end fund (CEFs) and mortgage real estate investment trusts (REITs).”

HYIN’s lineup is currently comprised of 35 BDCs, closed-end funds, and mREITs, ranging in weights of 2.49% to 3.18%.

“BDCs make loans to small and medium-sized companies and typically invest in first-lien, senior-secured floating rate loans that are issued to private corporations. CEFs are pooled investment vehicles that invest in high-yield bonds, broadly syndicated leveraged loans, collateralized loan obligations, residential and commercial mortgage-backed securities (MBS) and some private credit assets,” adds Flanagan.

Specific to BDCs, that asset class could prove fruitful for HYIN investors as interest rates rise because the bulk of the loans made by these companies are in the form of floating rate notes (FRNs), a corner of the bond market that benefits when rates climb.

As for HYIN’s real estate exposure, that too is potentially useful in the current environment because REITs have pricing power, making the asset class a favored inflation-fighting vehicle. Something to note is that alternative credit can be more volatile than traditional income-generating assets, but as HYIN shows, investors are compensated for that risk with a high yield.

“In this environment of looming Fed rate hikes, higher inflation and historically low interest rates, investors face a conundrum when looking for yield. Investors may wish to consider HYIN as a solution on this front to serve as a complement to their current asset allocations,” concludes Flanagan.

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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.