The Quest for Income: Smarter Approaches to Meet Client Income and Stability Needs

David Graham

4 years ago

In this stubbornly low-rate environment, investors have struggled to balance low cost with acceptable yield, as most standard bond benchmarks were not designed with investors in mind. With rate uncertainty on the rise, what’s the best way for investors to balance income, diversification, and downside protection?

In the upcoming webcast, The Quest for Income: Smarter Approaches to Meet Client Income and Stability Needs, Marc Zeitoun, head of strategic beta and private client advisory at Columbia Threadneedle Investments; Jay McAndrew, vice president and national sales manager at Columbia Threadneedle Investments; and Katherine Nuss, vice president and fixed income client portfolio manager at Columbia Threadneedle Investments will discuss the risks of traditional market cap-weighted bond indexing and highlight alternative methodologies to help financial advisors diversify their risks and maintain income.

For example, the Columbia Diversified Fixed Income Allocation ETF (NYSEArca: DIAL) follows an alternative indexing methodology to potentially help bond investors garner improved returns and potentially diminish the negative effects of sudden swings.

The bond ETF tries to reflect the performance of the Beta Advantage Multi-Sector Bond Index, a rules-based multi-sector strategic approach to debt market investing. The underlying smart beta index covers six sectors of the debt market, focusing on yield, quality, and liquidity.

The underlying index tries to target six sectors, including U.S. Treasury securities (10%), global ex-U.S. Treasury securities (10%), U.S. agency mortgage-backed securities (15%), U.S. corporate investment-grade bonds (15%), U.S. corporate high-yield bonds (30%), and emerging markets sovereign and quasi-sovereign debt (20%). Each sector is market value-weighted except for the global ex-U.S. Treasury Securities, which is equally weighted.

The Treasury securities exposures have a remaining maturity of greater than seven years and are rated investment-grade and U.S. denominated.

Global ex-U.S. Treasury exposures have a remaining maturity of between and including seven to 12 years and a yield of greater than 0% issued by Australia, Canada, France, Germany, Italy, Japan, New Zealand, Norway, Sweden, Switzerland, and the United Kingdom.

The U.S. agency mortgage-backed securities component is comprised of U.S. agency mortgage pass-through securities backed by pools of mortgages and issued by Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) that have a 30-year fixed-rate program, an issuance date of less than 1,000 days, and that are denominated in U.S. dollars.

The U.S. corporate investment-grade exposure is made up of investment-grade, fixed-rate, taxable, U.S. dollar-denominated debt with $250 million or more of par amount outstanding, issued by U.S. and non-U.S. industrial companies, utilities, and financial institutions that have remaining maturities of between and including five to 15 years, and a credit rating between and including BAA1 and BAA3.

The U.S. corporate high-yield debt component includes non-investment grade, fixed-rate, taxable corporate bonds that have a credit rating above B3 using the Bloomberg index rating methodology, an outstanding face amount greater than $800 million, and a remaining maturity of less than 14 years, and that were issued within the past five years.

Lastly, the emerging markets sovereign and quasi-sovereign debt sector includes fixed-rate sovereign and quasi-sovereign debt of emerging market countries rated investment-grade and non-investment-grade that have a credit rating between and including BAA1 and BA3 rating and remaining maturity of between and including five to 15 years.

Financial advisors who are interested in learning more about a smarter approach to income investing can register for the Thursday, September 30 webcast here.