It is getting easier for investors to fit alternative income strategies into their portfolios—an option that can boost yields and limit risk from the price declines that have devastated traditional bond funds.
While the marketplace is hardly crowded, the number of actively managed exchange-traded funds offering exposure to niche areas such as collateralized loan obligations is growing.
Last week, the asset manager Janus Henderson Investors (ticker: JHG) launched the Janus Henderson Securitized Income ETF (JSI), an actively managed fund that will invest in sectors such as asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), agency MBS, and CLOs. Other fund firms offer similar products.
It is an alphabet-soup of acronyms. CLOs are securities backed by a pool of corporate loans. Because they are floating-rate instruments, their coupons reset each quarter along with current interest rates, resulting in low price sensitivity to changes in interest rates. Bond prices fall when rates rise, as they have since early in 2022.
Janus Henderson said its newest ETF aims to generate high income through exposure to “the most-attractive opportunities on a risk-adjusted basis” across the U.S. market for securitized debt, created by packaging loans or other assets together and selling slices with different risk profiles to investors.
“Investors can achieve a lot of their income and duration goals with much lower credit risk in the securitized space than in many other sectors of the fixed-income market,” Nick Cherney, head of innovation at Janus Henderson, told Barron’s.
The launch comes on the heels of the firm’s success with other alternative income ETFs, including the $4.6 billion Janus Henderson AAA CLO ETF (JAAA), which hit the market three years ago.
So far this year, the fund has delivered total returns of 6.93% and has an annualized 30-day yield of 6.82%. It eked out a positive return of 0.53% in 2022, when many so-called core bond funds, a far more popular option offering broad fixed-income exposure, were down by double digits.
The iShares Core U.S. Aggregate Bond ETF (AGG), one of the biggest bond funds with $92 billion in assets, has a total return of minus 0.78%. year to date. AGG tracks the Bloomberg U.S. Aggregate Bond Index—considered the best total bond market index, representing U.S. government and investment-grade corporate bonds.
Todd Rosenbluth, head of research at VettaFi, a financial research and data company, said that as investors increasingly turn to fixed-income ETFs instead of traditional mutual funds, asset managers are launching a broader suite of strategies.
“We’ve started to see greater interest in loan-oriented ETFs,” he said. “Investors have found collateralized loan strategies to be an appealing place to invest in the current fixed-income market because they are higher quality, less interest-rate-sensitive strategies.”
Other firms, including VanEck, BlackRock (BLK), and Invesco (IVZ) have also climbed aboard with actively managed ETFs.
“This is a part of the market that does require active management and specialized expertise as there’s a complexity component,” said Paul Olmsted, senior manager research analyst for fixed income at Morningstar Research Services.
The $202.5 million
VanEck CLO ETF
(CLOI) has a 30-day annualized yield of 6.46% while the $56 million
BlackRock AAA CLO ETF
(CLOA) is yielding 6.71%. The $33 million
Invesco AAA CLO Floating Rate Note ETF
(ICLO) has a 30-day annualized yield of 7.13%.
For income investors looking to boost returns, there’s a whole world beyond traditional core bond portfolios.
Write to Lauren Foster at [email protected]
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