Traditional credit sources, including investment-grade, junk bonds and fallen angels, delivered solid performances in 2024. With expectations that the Federal Reserve will continue lowering interest rates next year, 2025 could be kind to credit.
That doesn’t diminish the allure of alternative. If anything, 2025 could be the ideal time for advisors to consider tapping more unique corners of the credit universe — a task made easier with exchange traded funds such as the WisdomTree Alternative Income Fund (HYIN).
HYIN, which follows the Gapstow Liquid Alternative Credit Index, sports a 30-day SEC yield of 11.24%. Alone, that’s eye-catching and a source of allure for income-hungry investors. However, there’s more to the HYIN story, including the ETF’s access to some illiquid corners of the credit landscape, including private and structured credit.
HYIN Methodology Matters
HYIN is home to 35 holdings. That figure may sound small compared to traditional fixed income funds. However, the ETF’s expansive reach into alternative credit is evident and commendable.
“HYIN provides exposure to high-yield bonds, structured credit, and private credit and is diversified by borrower type. The ETF includes exposure to corporate borrowers, household borrowers, and commercial real estate borrowers, each operating on different credit cycles,” noted Kevin Flanagan, head of fixed income strategy at WisdomTree.
In fact, diversification is central to the case for HYIN. The WisdomTree ETF doesn’t necessarily need to replace traditional credit exposures in fixed income portfolios. Rather, it can be a complement to those allocations.
Reduced Sensitivity to Interest Rate Changes
“Alternative credit offers diversification through its exposure to different types of borrowers and credit risks. This diversification means some investors can carve out a dedicated allocation to alternative credit in their portfolios, separate from traditional fixed income or equities. This trend, which began in institutional portfolios like pensions and endowments, is now reaching individual investor portfolios,” added Flanagan.
Alternative credit also offers reduced sensitivity to changes in interest rates. That’s something to consider. While current consensus wisdom holds that the Fed will lower rates in 2025, it is possible inflation could rise anew. This could put the central bank’s rate-cutting plans on hold. Many alternative credit assets, including those residing in HYIN, have floating rate components, making them less sensitive to changes in interest rates. Bottom line: HYIN is a catalyst-rich story heading into 2025.
“HYIN allows investors to access this complex and specialized asset class through a more democratized vehicle: the ETF. By combining the expertise of WisdomTree and Gapstow, we are providing a powerful tool for those looking to broaden their approach to seeking out yield,” concluded Flanagan.
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