Searching for Yield with Fixed-Income ETFs

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David Stephenson, Director ETF Strategy and Development, CIBC Asset Management.

What do I suggest for ETF investors seeking yield in today’s low-yield world? 2021 has been a challenging year for fixed income, as yields have increased across the yield curve, year-to-date, as of mid-October, by 55 to 90 basis points. In fact, the FTSE Canada Universe Bond Index is on track to have only its second negative calendar year return since the turn of the century, and worse year since 1994, when the index was down 4.3%.

Although bonds still provide ballast to investor portfolios and diversification from equity risk, and as yields rise, eventually relative valuation will look attractive, but yields on bonds, especially government bonds, are ultra-low. And for investors looking for income, the question is where do they find higher yields? Against this backdrop, investors are also concerned about inflation and whether it’s transitory or will become more persistent as rates have reached multi-year highs in both Canada and the U.S.

The good news for investors is the Canadian ETF market offers ample product choice and precise exposures to tailor a higher yield, such as corporate bonds, emerging market debt, US high yield, or even floating rate notes that adjust coupons to changes in interest rates. Given a difficult market environment for fixed income, actively managed ETFs are resonating with investors. For example, an unconstrained fixed income manager could compliment the core bond holding by finding the best opportunities for yield globally. The objective there is being to best position to portfolio for a more efficient yield than a single spread strategy, like high yield and add value by layering in different credit risk.

The global market is massive at over 100 trillion, so you can be responsive to opportunities across regions as they arise. Whether that’s an investment grade corporate credit, EMD, or non-traditional sectors, like asset backed securities and bank loans. Asset backed securities, for example, offer a 1% pickup in yield over corporate credit. An important point though is to ensure you are getting paid for the risk you are taking. Active managers take risk return into account, but it’s an important point for investors, as well, adding spread product to their portfolio in search of higher yields.

Another interesting option I expect to see further interest going forward is in one-stop fixed income solutions. Much like asset allocation, ETFs have grown significantly as an all-in-one portfolio solution, and are easy to use and convenient. An investor can purchase a one-ticket fixed income solution, which can help navigate through an uncertain and low-yield environment through active management, built-in rebalancing, and is tactically adjusted to take advantage of opportunities as they arise in corporate bonds, currency, or emerging market debt for example. Investors can use these portfolios as the core holding, and for global diversification, or as a discipline fixed income core, and augment that exposure to tailor a more precise investment, depending on client risk tolerances and objectives.

Searching for yield is not only within the fixed income component of your portfolio, but there are also opportunities on the equity side. For example, there has been significant interest in covered call strategies, which five to 10%, depending on the strategy. Whether it is a broad-based portfolio, or something sector specific. Flows have been good year-to-date, and the covered call ETFs are now a significant part of the overall market, currently with 12 billion in AUM. So much like one-stop fixed income and total portfolio solutions, investors are looking to outsource the time consuming nature and complexity in the case of covered calls to professional managers. Finally, we like low volatility dividend paying companies in today’s environment. The market is largely been on a risk-on environment this year, but there are relative areas of value. These factors, in combination, can result in an outcome that provide investors with a yield premium to the market with lower volatility and downside protection.