https://www.youtube.com/watch?v=-0iejbYQ7Eo

For this episode of ETF 360, ETF Trends CEO Tom Lydon sits down with Ed Rosenberg, senior vice president and head of ETFs at American Century Investments, to discuss investing in bond ETFs in a rising interest rate environment.

Rosenberg says the more than 6% drop in the Bloomberg Aggregate Bond Index in the first quarter has created an environment of opportunity for “normal investment” returns. Investing in bonds allows for a steady stream of income for investors, but investing in today’s rising rate environments requires a lot more caution when investing in the bond space.

“You have to be more selective; you have to look for things that create higher yield, potentially active, that’s even better in this environment, and has a shorter duration to prepare for those rate hikes because we want to take advantage of those yields but not necessarily be hurt on principle,” Rosenberg said.

One of the main areas to avoid in fixed income as interest rates rise is US Treasuries and all related areas of exposure. Instead, investors should look to credit, particularly within investment grade and high yield, and Rosenberg recommends finding funds where the fund team does its own analysis instead of relying on credit rating agencies. This potentially allows them to anticipate changes and identify the most successful companies.

Rosenberg also recommends investors invest in emerging markets.

“Now it seems strange with what is happening right now, but a lot of emerging countries have very good credit ratings, but not as good as the United States, which forces them to offer things at a higher yield. high to attract investors to this debt,” says Rosenberg.

Senior credit and convertibles are also areas that tend not to receive as much attention, but should be considered by investors as they offer income opportunities in convertibles and higher return potential. in shorter duration preferred stocks, which tend to be less correlated to interest rates.

MUSI offers a diversified and active exposure within alternatives

the American Century Multi-Sector Income ETF (MUSI) offers exposure to a wide range of fixed income options such as high yield, emerging markets and preferred stocks and is actively managed.

“What’s important about this is that a manager of an active fund, especially this one, turns the dial to the places that make sense,” says Rosenberg. “As the environment changes, for the Fed to raise rates, that’s short term.”

MUSI offers higher yield with a shorter duration (adjusted option duration is approximately 3.25 years) than most Agg-centric funds on the market today. It is also a diversified ETF; at the end of the last quarter, MUSI held nearly 225 different bonds chosen according to a highly selective process by the portfolio manager.

As more advisors move away from the traditional 60/40 portfolio and explore alternatives, MUSI is a very attractive fund.

“Advisors are actually excited because it’s a newer space in the ETF world. They’re excited that there’s a product like this, that they can still talk to their clients about ownership fixed income, but owning them in a different way,” says Rosenberg. “Is the risk a bit higher than something like Agg? Absolutely, but it’s that trade-off, that risk trade-off /reward for the performance they are really looking for.

For more ETF 360 videos, visit our ETF 360 channel.