Alternative ETF Strategies to Strengthen Your Income Portfolio
In a lower yielding environment for longer, ETF investors may look to non-traditional sources of income to bolster their fixed income portfolios.
In the recent webcast, Income for a better outcome: where to invest in non-traditional income, Jay D. Hatfield, CIO and Portfolio Manager at InfraCap Capital Advisors; George Goudelias, head of leveraged finance and senior portfolio manager at Seix Investment Advisors; and James Jessup, Product Manager at Virtus Investment Partners, highlighted four off-the-beaten-path ETF strategies to enable income-oriented investors to diversify beyond a traditional portfolio mix.
To begin with, active management ETF Virtus InfraCap US Preferred Stock (NYSEArca: PFFA) offers the potential for attractive returns while pursuing compelling total return results. The active management team selects and weights securities based on various quantitative, qualitative and relative valuation factors. Additionally, modest leverage – typically 20-30% – is used to improve portfolio beta, and options strategies are used to improve current income.
Preferred stocks are a class of equity securities that generally pay fixed or variable dividends to investors and have a âpreferenceâ over common stocks. However, preferred shares are subordinated to bonds. The issuing company must pay dividends to preferred shareholders before common shareholders and, in the event of bankruptcy or liquidation of the assets of the company, must put preferred shareholders’ claims ahead of common shareholders. In addition, preferred stocks regularly pay dividends, but investors generally do not enjoy capital appreciation comparable to that of common stocks.
The InfraCap REIT Preferred ETF (NYSEArca: PFFR) is the only ETF offering a diversified investment in preferred securities issued by real estate investment trusts (REITs). Preferred REITs tend to offer attractive return potential, both fixed income and equity characteristics, and low equity beta. Compared to traditional preferred securities, these securities are also generally exposed to less leverage with generally more predictable income streams than those issued by banks and insurance companies.
Active management Virtus Seix Senior Loan ETF (NYSEArca: SEIX) provides sophisticated leveraged loan investors with ongoing management of fundamental credit risk and enhanced liquidity in a transparent and profitable vehicle.
Senior Loans are typically used for business recapitalizations, acquisitions, debt buyouts, and refinancing. Leveraged loans have offered the possibility of higher income and lower correlations with other fixed income asset classes and, while they can potentially provide a hedge against rising interest rates, they have historically performed well in periods of stable interest rates.
The ETF is under-advised by Seix Investment Advisors LLC, which will manage the portfolio investments. Seix seeks to generate competitive risk-adjusted absolute and relative returns over the entire market cycle through a bottom-up, knowledge-driven process. Seix uses multidimensional approaches based on a strict portfolio construction methodology, sales disciplines and trading strategies with prudent risk management as a cornerstone. Their philosophy of investing in leveraged loans emphasizes BB and B rated loans, seeking to invest in the healthiest, most undervalued credits in the lower quality space.
Finally, the Virtus Newfleet ABS / MBS ETF (NYSE: VABS) can complement a traditional fixed income portfolio. The ABS (auto loans, equipment rental, credit card receivables, student loans, etc.) and MBS (mortgage pools, residential and commercial, agency and non-agency loan pools) sectors offer a range of investment opportunities broader and much needed diversification compared to traditional fixed income. With a focus on off-index niches of securitized credit markets, Newfleet’s securitized credit specialists employ their characteristic relative value approach, exploiting inefficiencies by continuously evaluating the market, sectors and securities.
VABS is also aiming for a term of between one and three years, significantly shorter than traditional core bond strategies, while focusing on investment grade securitized credit, which has historically offered a yield advantage over corporate bonds. traditional companies of similar rating.
Financial advisors who want to learn more about alternative income strategies can watch the webcast here on demand.