As Treasury yields hit generational highs this week and the U.S. labor market adds more jobs , several new exchange traded funds are giving investors ways to take on risk and boost their income — either through active management or junk bonds. The Pimco Multisector Bond Active ETF (PYLD) launched in June, giving investors a way to follow one of the biggest names in fixed income during the volatile bond market. The fund has not yet made its first distribution, so it has no official yield, but its top holdings include mortgage-backed securities and corporate bonds from major banks with coupons above 5%. The new Pimco fund is part of a larger trend. As the fixed income ETF market matures, major asset managers are trying their hand at multisector bond funds. Recent launches include Capital Group’s U.S. Multisector Income ETF (CGMS) and BlackRock’s Flexible Income ETF (BINC) , which is co-managed by Rick Rieder , the firm’s chief investment officer for global fixed income. Those funds have 30-day SEC yields of 6.42% and 5.65%, respectively. The team managing PYLD includes Pimco Group CIO Dan Ivascyn and managing director Sonali Pier, who said the sharp rise in rates over the past 18 months made it a good time to launch an active product ahead of the second half of 2023. “It may not be necessarily the perfect entry point from a credit spread perspective, but you need to stay invested because the income is substantial,” Pier told CNBC. “And the flexibility and the liquidity here would allow us to, if we see an opportunity, shift between asset classes, shift to relative value between industry sectors.” “Today, with the starting valuations, you see the potential for positive returns even with spreads widening, potentially. The starting point is important,” she added. One downside to using active management is that managers’ past success doesn’t guarantee future outperformance. PYLD dipped 0.64% on Thursday, when a surprisingly hot ADP employment report sent yields soaring. The fund also carries a net expense ratio of 0.55%, making it pricey relative to bond index funds. PYLD 5D mountain Shares of PYLD fell on Thursday when yields rose. For financial advisors or investors who want to make investment decisions themselves, there are more targeted bond funds available. One new ETF expected to launch next week is the Schwab High Yield Bond ETF (SCYB). The fund will track an index of junk bonds that look more attractive now as the U.S. economy has proven surprisingly resilient at dodging a recession. “We would acknowledge that high yield credit spreads tend to be pretty sensitive to the macroeconomic environment. So if you’re worried about a recession, there could be some downside in spreads moving wider,” said D.J. Tierney, Senior Portfolio Strategist at Schwab Asset Management. “But no one’s got the perfect crystal ball. And the entry point right now, with broad high yield index yields north of 8%, you’ve got a reasonable cushion in there in terms of the starting yield.” The Schwab fund will also be relatively cheap, with an expense ratio 0.10%, according to its prospectus. That is cheaper than the biggest high yield bond offerings from iShares ( HYG ) and State Street ( JNK ). To be sure, many economists still expect the U.S. to fall into a recession later this year or in early 2024, and the jobs report for June showed slower-than-expected job growth. There are also low-cost ETF options from Schwab and its competitors for investors who prefer to stick to the safer sectors of the fixed income market, such as Treasurys. These new funds are hitting the market after a strong first half from bond ETFs in terms of flows. Fixed income investing has historically been slower to shift to ETFs than equities, but Treasurys were the most popular category for ETF flows in the first half, according to Strategas. Schwab’s Tierney said two of the three most popular Schwab funds in the first half were fixed income, and he expects that growth to continue for several reasons. “We’re playing catch-up. We’re a little over a year from the Fed making a historic move,” Tierney said. “There’s a pretty long runway for investors to increase their allocation to fixed income. The demographic tailwinds are really strong, if you look at the baby boomer generation and the way their portfolios are allocated.”
This story originally appeared on CNBC
