Rising inflation and interest rates have taken a toll on bonds and other fixed-income investments. With few promising alternatives, many investors have turned toward dividend stocks, preferred equity, or high-yield bonds. Actively-managed funds offer investors diversified exposure to these securities and expert portfolio management.
Let’s take a look at the top five active income ETFs launched this year that could offer investors a fixed-income alternative.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
Top 5 Active Income ETFs
Here is the list of the top five active ETFs, shown in terms of year-to-date performance in descending order.
1. Capital Group Dividend Value ETF (CGDV)
Capital Group’s Dividend Value ETF (CGDV) seeks to produce income above the average yield on U.S. stocks while providing an opportunity for principal growth. Most of the portfolio consists of large-cap U.S. stocks, but the fund allows for up to 10% international diversification and typically holds around 50 public companies in total.
- Expense Ratio: 0.33%
- YTD Performance: +3.67%
2. Fidelity Sustainable High Yield ETF (FSYD)
Fidelity’s Sustainable High Yield ETF (FSYD) invests in high-yield junk bonds that the managers believe have proven or are improving their ESG ratings over time. The team uses both exclusionary criteria and its own discretion when deciding on appropriate investments while reserving the right to invest in foreign offerings and higher credit bonds.
- Expense Ratio: 0.55%
- YTD Performance: -2.69%
3. Capital Group Core Plus Income ETF (CGCP)
Capital Group’s Core Plus Income ETF (CGCP) seeks higher income than core bond funds with low equity correlations. With a focus on fundamental analysis, the managers select government, corporate, emerging market, and municipal debt from across the credit spectrum on an opportunistic basis to maximize income.
- Expense Ratio: 0.34%
- YTD Performance: -3.82%
4. Dividend Performers ETF (IPDP)
Innovative Portfolios’ Dividend Performers ETF (IPDP) invests in dividend-paying stocks paired with an S&P 500 index-based option overlay for additional income. Before its listing on March 7, 2022, the ETF operated as a mutual fund, and it has a well-established track record of beating the S&P 500 index over the past three years (22.14% vs. 18.92% annualized).
- Expense Ratio: 0.85%
- YTD Performance: -4.23%
5. Preferred Plus ETF (IPPP)
Innovative Portfolios’ Preferred Plus ETF (IPPP) takes a similar approach, investing in preferred equities and an S&P 500 index-based option overlay for additional income. Like IPDP, the ETF operated as a mutual fund before its conversion on March 7, 2022, but it didn’t outperform the benchmark index, recording roughly the same.
- Expense Ratio: 0.85%
- YTD Performance: -4.60%
Fund performance data as of April 14, 2022.
Alternatives Income Investments
Actively-managed ETFs are well-suited for income strategies, given their ability to balance income with risk, particularly in the bond market. However, they aren’t the only option for increasing portfolio yield during a rising interest rate environment. Fortunately, investors have a lot of options when it comes to generating yield with less duration risk.
Some alternatives include:
- Individuals that fall into high tax brackets might use municipal bonds to boost after-tax returns.
- Covered call ETFs provide extra income by writing covered calls and collecting premiums against benchmark indexes.
- I-Bonds provide a unique opportunity to invest up to $10,000 in government bonds yielding more than 7%.
- Real estate investments tend to perform well during inflationary environments by adjusting rents upward.
The Bottom Line
Investors who want to maximize income may want to look outside conventional fixed income, given rising inflation and interest rates. Over the past few months, a series of new income-focused actively-managed ETFs helped fill the void. These funds employ strategies spanning dividends, preferred stocks, and high-yield bonds.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.