2019’s record year for bond prices helped investors who were looking to capitalize on price gains, but it did no favors for those relying on yield for income purposes. Treasury yields hit lows as the central bank implemented rate-cutting measures in 2019, but investors in 2020 can feed their need for yield by getting active and going overseas.
The Federal Reserve put its more dovish side on display last year, which pivoted from 2018’s rate-hiking bonanza. In addition, fixed income investors are facing other challenges like inverted yield curves and signs of slowing global growth, but the chase for yield isn’t an impossible endeavor.
Get Active with Bond Funds
One way for yield-started investors to counteract the low levels of yield in today’s fixed income environment is to look at actively managed funds.
“When you’re looking to invest in a bond fund, cost is probably top of mind. Indeed, that’s often what attracts fixed income investors to bond index funds, which tend to be much less expensive than actively managed funds,” a WisdomTree article noted. “However, when it comes to the mainstream U.S. bond market—to say nothing of riskier emerging-market and high-yield issues—having a manager handpick a fund’s portfolio can make sense.”
One fund to look at for active exposure is the American Century Diversified Municipal Bond ETF (NYSEArca: TAXF). By focusing on municipal debt issues, TAXF seeks current income that is exempt from federal income tax—under normal market conditions, the portfolio managers invest at least 80% of the fund’s net assets, plus borrowings for investment purposes, in municipal securities with interest payments exempt from federal income tax. The fund principally invests in investment-grade debt securities but may invest in high-yield securities.
Head Overseas for Bond Exposure
Investors can also head overseas to look for higher yield assets via ETFs like the Vanguard Total International Bond Index Fund ETF Shares (NasdaqGM: BNDX). BNDX seeks to track the performance of a benchmark index that measures the investment return of non-U.S. dollar-denominated investment-grade bonds.
BNDX employs an indexing investment approach designed to track the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). This index provides a broad-based measure of the global, investment-grade, fixed-rate debt markets.
For investors seeking high-yielding income and emerging markets exposure, they can look to the VanEck Vectors EM High Yield Bond ETF (NYSEArca: HYEM). HYEM seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.
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