As the volatility of traditional bond funds continues to plague investors, there is a growing interest in alternative income strategies that can help boost yields and limit risk. While the market for such strategies is still relatively small, the number of actively managed exchange-traded funds (ETFs) offering exposure to niche areas like collateralized loan obligations (CLOs) is on the rise.
One of the latest offerings in this space is the Janus Henderson Securitized Income ETF (JSI) launched by asset manager Janus Henderson Investors (ticker: JHG). JSI is an actively managed fund that focuses on sectors such as asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), agency MBS, and CLOs. Similar products are also being offered by other fund firms.
The securitized debt market may seem like an alphabet soup of acronyms, but it presents unique opportunities for investors. CLOs, for example, are securities that are backed by a pool of corporate loans. These instruments have floating interest rates, which means their coupons reset each quarter based on current interest rates. This characteristic results in low price sensitivity to changes in interest rates. This is particularly important because bond prices have been falling since early 2022 as interest rates rise.
Janus Henderson’s JSI ETF aims to generate high income through exposure to the most attractive opportunities in the securitized debt market in the U.S. This market is created by packaging loans or other assets together and selling slices with different risk profiles to investors. According to Nick Cherney, head of innovation at Janus Henderson, investors can achieve their income and duration goals in the securitized space with much lower credit risk compared to many other sectors of the fixed-income market.
The launch of JSI follows the success of Janus Henderson’s other alternative income ETFs, including the $4.6 billion Janus Henderson AAA CLO ETF (JAAA), which has been in the market for three years.
In summary, alternative income strategies are becoming more accessible to investors through actively managed ETFs. These strategies can provide higher yields and better risk management, especially in the face of price declines in traditional bond funds. The securitized debt market offers unique opportunities for income generation, and fund managers like Janus Henderson are capitalizing on this by offering specialized products like the JSI ETF.
Bond Funds Delivering Positive Returns in 2022
This year, an alternative option to core bond funds has been gaining traction among investors. While many core bond funds have experienced significant losses, one fund managed to achieve a positive return of 0.53% in 2022. The fund, with total returns of 6.93% and an annualized 30-day yield of 6.82%, has outperformed its peers.
Meanwhile, the iShares Core U.S. Aggregate Bond ETF (AGG), which is one of the largest bond funds with $92 billion in assets, has seen a total return of -0.78% year to date. The AGG tracks the Bloomberg U.S. Aggregate Bond Index, widely regarded as the premier total bond market index consisting of U.S. government and investment-grade corporate bonds.
According to Todd Rosenbluth, head of research at VettaFi, the surge in interest in fixed-income ETFs has prompted asset managers to introduce a wider range of strategies. Among these strategies, loan-oriented ETFs have emerged as an appealing choice for investors in the current fixed-income market. Collateralized loan strategies offer higher quality and less interest-rate-sensitive investment options.
Recognizing the complexities inherent in this market segment, other firms such as VanEck, BlackRock (BLK), and Invesco (IVZ) have also introduced actively managed ETFs. These firms emphasize the importance of active management and specialized expertise in this sector.
VanEck’s CLO ETF (CLOI) manages assets totaling $202.5 million and has a 30-day annualized yield of 6.46%. Similarly, BlackRock’s AAA CLO ETF (CLOA), with $56 million in assets, is yielding 6.71%. Invesco’s AAA CLO Floating Rate Note ETF (ICLO), managing $33 million in assets, boasts a 30-day annualized yield of 7.13%.
For income investors seeking to enhance their returns, a realm beyond traditional core bond portfolios presents a world of opportunities.