The ugly bear market in bonds has left income investors wary of bond funds. But there’s another way to diversify your fixed-income portfolio and boost yields without adding a lot of risk—with funds that buy securitized assets. Banks bundle pools of loans—commercial loans to businesses, auto loans and home-equity loans—to create a security asset that pays a steady stream of interest like a bond. These asset-based securities are divided into shares and sold to investors. Dividends come from the money borrowers pay each month on the underlying loans. Securitized assets don’t move in sync with the bond market. They can be less interest rate–sensitive and pay higher yields than similar corporate bonds. More than a dozen actively managed securitized income ETFs are available from major fund families. Caveats…
Stick with funds that focus on high-quality securitized assets and have an average credit rating of A or higher.
If short-term interest rates remain the same or rise this year due to inflation, consider a fund like…
Janus Henderson AAA CLO ETF (JAAA) specializes in collateral loan obligations (CLOs), whose rates reset each quarter according to changes in interest rates. Recent yield: 6.8%.*
If interest rates fall, consider funds that can purchase any type of securitized assets, most of which do not have floating rates. Examples…
Touchstone Securitized Income ETF (TSEC). Recent yield: 5.81%.
Janus Henderson Securitized Income ETF (JSI), recently launched, expects a dividend yield of 7.5% to 8.5%.
*Performance figures are as of January 12, 2024, according to Morningstar, Inc.
