If 2020 is teaching income investors anything it’s that they cannot rely solely on either U.S. Treasuries or common stock dividends to bolster income. Even combining those two asset classes is likely to leave investors thirsty for income.
Enter the Principal Active Income ETF (YLD), which is a departure from traditional multi-asset ETFs. Standard multi-asset ETFs feature exposure to common stocks, master limited partnerships (MLPs), real estate investment trusts (REITs), closed-end funds, and preferred stocks. However, as an actively managed YLD has latitude to focus on the managers’ best ideas while avoiding yield traps, some REITs and MLPs have been this year.
YLD is an actively managed fund that seeks to achieve its investment objective by investing its assets in investment grade and non-investment grade fixed income securities and in equity securities. The fund’s Sub-Advisors, actively and tactically allocates the fund’s assets among fixed income securities and equity securities in an effort to take advantage of changing economic conditions that the Advisor believes favors one asset class over another.
The Federal Reserve’s decision to keep interest rates near zero didn’t do any yield seekers any favors, especially if they’re parking capital in safe haven Treasury notes. With the search for yield still a challenge in today’s fixed income market environment, it’s important for investors to not rely heavily on dividends for income purposes.
Understanding YLD
During uncertain times like today’s pandemic-ridden economy, it’s difficult to navigate the market environment with the same gusto during the extended bull market. That said, when it comes to fixed income allocation, sometimes it’s best to leave it up to the experts via active management.
YLD assets are allocated across various income-producing asset classes to optimize portfolio stability, efficient growth, and income with a defensive quality bias. The ETF’s corporate bond exposure could prove particularly useful in the current market climate.
The federal government backstopping U.S. corporate debt during the height of the pandemic gave the bond markets a nice boost, and some hedge funds are expecting that the party isn’t over just yet. Some funds are doubling down on corporate bonds, particularly of the riskier, longer duration variety.
Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means higher sensitivity to shifts in rates.
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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.