Fortunately, structured credit products can help mitigate these risks with financial engineering. For instance, mortgage-backed securities (MBS) bundle home loans and other real estate debt to create collateralized bonds. These bonds typically have blended interest rates and maturities or have floating interest rates that adjust to higher-rate environments.
Let’s take a closer look at these products and how you can build exposure into your portfolio with active ETFs.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
When investing in structured credit, an experienced fund manager is essential to mitigate risk and maximize returns. That’s because structured credit is a broad field requiring expertise in everything from aircraft leasing contracts to credit card portfolio valuations. In addition, each type of structured credit product has its own risk factors and market dynamics.
Of course, it’s easy to see the value of these products in today’s environment. Higher interest rates are gutting bond prices, while the potential for a recession makes high-yield bonds risky. Structured credit products offer significant diversification and have historically had a low correlation with conventional asset classes, like stocks and bonds.
Leveraging their fixed-income experience, the fund managers use fundamentals-driven research to build a diversified portfolio of structured credit products. Unlike many legacy counterparts, the fund goes beyond non-agency mortgage-backed securities with a 40% allocation to asset-backed securities, collateralized loan obligations, and corporate debt.
In addition to meeting the demand for higher yields, the fund aims to diversify risks that arise from position sizing, geography, ratings, duration, deal structure, and collateral values while investing in securities with low volatility. As a result, the managers hope to mitigate fixed-income risks and generate better risk-adjusted returns for shareholders.
Check out Mortgage Backed Securities Funds page to explore all mutual funds and ETFs in this space.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.