Beyond Bonds: Where Investors Find Income as Rates Rise — SkimNews
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- Tyler Glover of William Blair said advisors are responding to rate-driven uncertainty by trimming traditional fixed income and rotating into ultra-short bonds and a "host of alternative strategies" that can generate current income without direct rate exposure.
- Catastrophe bonds offer mid-to-high-single-digit returns uncorrelated with traditional markets, per Paul Karger of TwinFocus Capital Partners, whose firm allocates 3-5% to the asset class; the Victory Pioneer CAT Bond Fund (CBYYX) recently surpassed $2 billion in AUM, while the Brookmont Catastrophic Bond ETF (ILS) returned 5.57% YTD through August 31.
- Merger arbitrage ETFs deliver returns uncorrelated with interest rates with a bond-like risk profile, according to Jeff Mortimer of Elyxium Wealth; options include NYLIM Merger Arbitrage ETF (MNA, 68 holdings, 0.77% expense ratio), AltShares Merger Arbitrage ETF (ARB, 62 holdings, 0.76%), and ProShares Merger ETF (MRGR, 41 holdings, 0.75%).
- Michael W. Crook of Janney Montgomery Scott is cooling on MLPs given their interest-rate sensitivity now that the 10-year Treasury is in the upper 4% range; the Global X MLP ETF (MLPA) carried a 30-day SEC yield of 6.82% as of September 4.
- Stuart Katz of Robertson Stephens is targeting collateralized asset-backed lending against real assets like rail cars and gas-producing wells — shorter-duration positions generating tax-deferred yields in the 6%-10% range, accessed via the Janus Henderson Asset-Backed Securities ETF (JABS, 0.33% expense ratio).
- Preferred stocks offer ongoing income but are themselves rate-sensitive; the iShares Preferred & Income Securities ETF (PFF) had a 30-day SEC yield of 6.52% as of July 31 with a 0.45% expense ratio.
- Matt Gentzkow of Coastal Bridge Advisors warned the hunt for yield carries a real cost: "there's a tradeoff between adding income from other sources and adding other risk to your portfolio," and he cautioned against concentrating in one sector-exposed pool of income-generating assets.
Why it matters: Income-hungry investors face a structural tradeoff in a 4%-plus Treasury world: true rate-uncorrelated yield exists in niches like cat bonds, merger arbitrage, and short-duration private lending, but several of the most accessible "alternatives" — MLPs, preferred stocks, REITs — remain rate-sensitive themselves, meaning diversification away from bonds doesn't necessarily mean diversification away from rate risk.
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