The hunt for yield has intensified.
Investors are turning to alternative securities for income as inflation fears grow and Treasury yields remain relatively low – and some may be worth considering, according to market analysts.
They include short-term, inflation-protected securities, which mature quickly and can help reduce risk if interest rates rise, and convertible securities, often bonds or preferred stocks that investors can convert at any time into common stock of a given company, American Century’s Ed Rosenberg told CNBC’s “ETF Edge” this week.
With short-term investments, “you eliminate the potential credit risk presented by long-term inflation-protected securities,” said Rosenberg, director of exchange-traded funds and senior vice president of his company.
“When you own convertible securities you get a bit higher return – admittedly it’s not that high – and on top of that you also tend to have a bit less volatility when rates start to rise or when inflation comes into play, ”he said in Monday’s interview.
Actively managed ETFs can also prove useful in an environment of inflation, as managers can be nimble during times of volatility and generate higher returns over time, Rosenberg said.
American Century’s new Multi-Sector Income ETF (MUSI) aims to bring together shorter duration, higher yield and active management under one roof with its portfolio of investment grade bonds and other debt vehicles, Rosenberg said. It’s down less than a tenth of 1% since its launch in July.
Many investors opt for strategies like American Century’s rather than broader fixed income indices because they realize that it pays to be selective, said Tom Lydon, CEO of ETF Trends , in the same interview.
“Not all constituents of these fixed income indices are created equal,” Lydon said. “What Ed says about active is really going to be key and critical. And since they’ve been coming up with these kinds of strategies quite recently and they tend to be smaller, you get some of their best ideas.”
As investors and advisers move away from the 60-40 stocks-to-bond portfolio allocation and more towards 70-30 or even 80-20, alternative income strategies also have a moment, Lydon said.
He highlighted covered buying strategies such as Equity Premium Income ETF (JEPI) from JPMorgan, Nationwide Risk-Managed Income ETF (NUSI) and NASDAQ 100 Covered Call ETF (QYLD) from Global X to deliver returns. particularly high combined with exposure to equities.
JEPI and NUSI both report almost 8% while QYLD report almost 12%.
“It’s something that can replace the current exposure to equities and also give you the return you’re looking for,” Lydon said.