Get Active Exposure as Corporate Confidence Returns in Bonds

Confidence is returning to the bond markets and one sign is corporations’ willingness to start taking on debt again with new issuance.

While inflation is still high, the expectation is that the Federal Reserve will eventually lessen the pace of interest rate hikes. That said, companies may be more apt to start borrowing again and re-finance the debt at lower rates in the future when the Fed eventually loosens monetary policy.

“Companies have rushed to borrow tens of billions of dollars this week, a sign that optimism about the outlook for the economy is beginning to take hold,” the New York Times reported.

The threat of a recession still looms, which could be an ideal scenario for bonds given their use as a safe haven asset. However, those thoughts of a recession may be slowly fading into the background.

“It’s a sign of rising confidence that companies are willing to borrow rather than conservatively manage their debt loads, and investors are willing to lend rather than sit on cash, as concerns about a potential recession diminish,” the NY Times added further.

To get access to core bond exposure, exchange traded funds (ETFs) can offer investors that level of access. With a plethora of ETF options in the market, certain investors may want to focus on core exposure with tax-efficient income generation.

Tax-Efficient Income Generation

That said, investors looking to get core bond exposure with an added bonus of income generation may want to take a look at the actively managed NEOS Enhanced Income Aggregate Bond ETF (BNDI). The active component allows the fund’s portfolio managers to remain pliable with market conditions, allowing them to adjust holdings when market conditions warrant adjustments.

The majority of the fund rests in holdings of other ETFs — namely the Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG). Both funds are heavily used in the ETF market as tools for core bond exposure, providing liquidity, which is ideal in an active fund.

To extract more income from the market, the fund also includes the sale of SPX Index options classified as section 1256 contracts, which are subject to lower 60/40 tax rates. This is where the fund’s tax efficiency offers investors income while decreasing their tax burden.

In terms of yield, BNDI offers a monthly distribution currently (as of August 31) of 5.25% with a 30-day SEC yield of 2.40%. The fund’s gross expense ratio comes in at 0.61% while the next expense ratio is 0.58%.

For more news, information, and analysis, visit the Tax-Efficient Income Channel.