Risk-Controlled Income Still a Necessity in This Environment

For the three months ending Aug. 3, 10-year Treasury yields slipped 28% – another reminder that yields are low and the income part of fixed income is getting harder to come by in 2021.

A typical response by investors in times like these is to stretch for yield, either with junk bonds or high dividend stocks, some of which are offered by companies with strained balance sheets. Fortunately, advisors can present clients with better income-generating ideas, including WisdomTree’s Fixed Income Model Portfolio.

That model portfolio is an ideal consideration for advisors looking to tap into the concept of risk-controlled yield, or, in simpler terms, adequate yield for clients without taking on significant credit or interest rate risk.

The model portfolio is all the more relevant at a time when real yields are negative across the yield curve, meaning investors buying Treasuries today and holding those bonds until maturity will likely lose money.

“Bottom line…rates are low and most likely to grind higher as the economy recovers, and spreads are historically tight. Corporate balance sheets generally are in good shape, so coupons should be safe, but there is not a lot of optimism about risk-controlled total return potential,” according to WisdomTree research.

A prime benefit of the WisdomTree Fixed Income Model Portfolio is that it can offer clients more income and more credit opportunities than traditional bond benchmarks.

“Our own Model Portfolios are short duration and overweight credit, with an explicit focus on quality security selection, relative to the Bloomberg Barclays U.S. Aggregate Index (the ‘BarCap Agg’), but we definitely are not looking to take excessive risk in our fixed income portfolios in a ‘reach for yield,’” said the issuer.

Among individual risk-controlled yield ideas to consider, there’s the WisdomTree Alternative Income Fund (HYIN).

HYIN, which debuted in May, follows the Gapstow Liquid Alternative Credit Index (GLACI). HYIN sports a whopping 7.64% 30-day SEC yield, which is sourced from high-yielding asset classes such as business development companies (BDCs), real estate investment trusts (REITs) and closed-end funds (CEFs). That’s a diverse approach many income strategies lack.

“HYIN not only provides investors with a solution for attaining higher yields, it can also potentially smooth out performance by avoiding the heightened volatility that comes with the concentration risk that can be associated with other market cap based alternative credit vehicles,” adds WisdomTree.

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.