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Counter Rising Rates With This Multi-Income ETF

Just getting core bond exposure in today’s market environment won’t be enough to maximize income for yield seekers. In order to counter the rising tide of high interest rates, a multi-pronged approach is sometimes necessary.

This is especially the case now as inflation is proving to be more stubborn than originally anticipated. The U.S. Federal Reserve continues its dogfight with rising inflation and according to the CME Group’s Fedwatch Tool, another rate hike is expected this month.

“Analysts expect inflation to have heated up last month, driven by rising oil costs. Core CPI, which strips away volatile food and energy prices, is seen cooling on an annual basis,” Reuters reported. “The hotly anticipated CPI data will give market participants a snapshot of August inflation, and could provide some illumination regarding the duration of the U.S. Federal Reserve’s restrictive policy cycle.”

Diversified Income Sources

One way to counter against rising rates is to not rely on one source of income. As such, diversification can offer fixed income seekers the ability to draw yield from instruments that can flex with a tight monetary policy such as floating rate notes.

That’s the case when utilizing the American Century Multisector Floating Income ETF (FUSI), which is primarily composed of floating rate Treasury notes, but also includes other avenues for yield. FUSI, with its over 70 holdings (as of July 31), draws income from other sources. These include mortgage-backed securities (MBS) and collateralized loan obligations (CMOs).

As a result of this multisector approach to yield, its 30-day SEC yield is 6.38% (as of August 31) and its 12-month distribution rate is 5.79%. Furthermore, investors don’t have to sacrifice credit quality in order to get more yield as the fund’s holdings are primarily investment grade with over 30% in U.S. government bonds and another 45% in AAA-rated debt.

Underpinning the fund’s strategy is its active management that only comes at a 0.27% expense ratio. An actively managed fund like FUSI allows its portfolio managers to maintain pliability in the market. This allows for adjustments to the fund’s core holdings when market conditions suggest changes are necessary.

You can use FUSI to help diversify a bond portfolio as a complement to core bond exposure. The latter can be used as a shock absorber with core bond exposure when the equities market experiences a downturn. Meanwhile, FUSI has a use solely as an income supplier.

For more news, information, and analysis, visit the Core Strategies Channel.

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