The market narrative appears to change on a dime these days. Stocks may have staged a comeback to recoup almost all their post-“Liberation Day” losses. But the bottom line on the fixed income market hasn’t changed all that much. Bonds are continuing to sell off — sending the 30-year Treasury yield soaring above 5%. And the yield curve continues to remain steep.
Investors are scrambling to sift through the noise and weather the volatility storm. And more issuers are stepping up to heed the call. Amid all the chaos, there’s been no shortage of new issuance cropping up in the fixed income space these days. Here are just a few of the latest launches over the past several weeks.
Staying Nimble: Dynamic Fixed Income Rotation Strategy
Earlier this month, Astoria Portfolio Advisors added to its roster with a new Dynamic Core U.S. Fixed Income ETF (AGGA). It’s an actively managed “fund of funds” investing in third-party ETFs that span the universe of fixed income. Holdings can include anything from municipal bonds and Treasuries to high yield, corporate bonds and structured and private credit offerings. The fund, which has so far amassed $32 million in net inflows, seeks to outperform broader benchmarks by dynamically adjusting allocations based on the perceived interplay between credit and duration. Those are two critical variables on the fixed income front.
AGGA relies on more than 14 years of active, tactical fixed income experience, and fundamental macro analysis to decide how to rotate into and out of sectors. The fund is designed to be a “risk-aware” supplement to passive bond strategies. It charges a 0.56% expense ratio. Right now, top holdings include a handful of intermediate-to-long government and corporate bond ETFs. The fund presents a nimble way for investors to gain exposure to everything – much like a Swiss army knife for bonds – and who want to leverage Astoria’s expertise to allocate for them.
Murky Outlook for MBS
Regan Capital recently entered the ETF fray last February with the launch of its Floating Rate MBS ETF (MBSF). And just rolled out a new Fixed Rate MBS ETF (MBSX) this month. The fund focuses on fixed-rate agency and residential mortgage-backed securities, aiming to offer stable income and high-quality exposure to the mortgage market.
This is certainly a sector primed for active management. However, the current rate backdrop presents a challenging climate for fixed-rate MBS. Recent tariff rhetoric has simmered down. And the jobs market is holding up for now, spurring on the Federal Reserve’s rate policy to trend in a less dovish direction. The yield on the 10-year Treasury note has risen more than 20 basis points since the last FOMC meeting.
When rates rise, homeowners are less likely to refinance, and prepayments will drop — effectively lumping those mortgages into the long-duration category. Long rates have barely budged this year. And MBS are one of few fixed income securities that have no specified end date. Right now, the fund is very defensively positioned – with 50% of the fund’s holdings in Treasury bills. MBSX charges an expense ratio of 0.4%.
Deferred Income: A Derivatives-Based Approach
Bonds can be esoteric enough to the average investor, without introducing the use of derivatives. But Aptus is known for doing just that — taking a heavily options-based approach to ETF strategies. The Aptus Deferred Income ETF (DEFR) uses options and swaps to minimize taxable distributions, shifting current income from bond ETFs into longer-term capital appreciation. The fund does so by creating a noncoupon-paying stream of payments that replicates the risk/return profile of the Agg.
Instead of paying out coupons, investors are keeping the coupons to minimize or defer all distributions. They are then rewarded with compound growth from reinvested coupons. This ETF might present an interesting opportunity for investors who want to grow capital and are looking for long-term returns with little need to withdraw near-term cash payouts.
DEFR comes with a somewhat hefty price tag of 0.79%.
Issuers are knocking down the doors to offer endless new ways to slice and dice the bond market. Meanwhile, advisors and investors are seeking active managers who can help them navigate more esoteric concepts via flexible strategies. Coming off a record year for active fixed income ETFs (to the tune of $200+ billion in net flows), we’re already seeing roughly half of that just in the first five months, well on pace to raise the bar yet again as ETF innovation rolls on.
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