While many investors have been comfortably settled in large-cap tech stocks, upcoming potential rate cuts could introduce new investment opportunities, including bond options. It’s crucial for investors to strategically position their portfolios to benefit from the Federal Reserve’s anticipated rate cut this year. Once the cut occurs, a significant inflow of assets into the market is expected. The key question is: how should investors prepare their portfolios ahead of a possible rate reduction?
Although some may continue to favor large-cap equities, bond investing might present emerging opportunities. Jimmy Lee, Founder and CEO of The Wealth Consulting Group, recently shared with CNBC that he anticipates a diversification in investment flows as interest rates start to decrease.
“Certain asset classes, like public real estate which has taken a hit, or longer duration bonds linked to a ten-year treasury, have the potential for a swift rebound. I believe this shift could happen quite rapidly,” Lee remarked.
Diversified REIT Exposure
Investors looking to get ahead of these expanding fund flows can consider fixed income options from BondBloxx. For instance, the BondBloxx USD High Yield Bond Financial & REIT Sector ETF (XHYF) offers partial exposure to the Real Estate Investment Trust (REIT) sector.
Although XHYF’s high-yield bonds might make a REIT investment a bit more volatile, the fund’s diversified portfolio provides a balancing effect. XHYF has a stronger exposure to the financial services sector, which helps to mitigate volatility from any potential underperformance in the REIT sector. Additionally, the majority of bonds in the fund have a credit rating between BB1-BB3, presenting a lower default risk compared to other high-yield options.
Long-Term Treasuries
For those seeking an investment-grade option, the BondBloxx Bloomberg Ten Year Target Duration US Treasury ETF (XTEN) is worth considering. This fund primarily invests in U.S. Treasury securities with an average duration of around ten years.
Given the recent rise in the ten-year treasury yield, now could be an opportune moment to explore XTEN. Long-term bonds offer substantial potential for higher yields over time while significantly reducing reinvestment risk.
Savvy investors can capitalize on unconventional opportunities to secure returns that others might overlook. One such strategy involves leveraging after-tax income. An experienced fund manager can tailor a strategy to provide superior after-tax returns compared to traditional market options.
Innovative After-Tax Income Strategy
The BondBloxx IR+M Tax-Aware Short Duration ETF (TAXX) exemplifies this approach. The fund aims to help investors achieve after-tax income while maintaining capital preservation.
TAXX offers a diversified portfolio, with at least half of its assets invested in municipal bonds. According to recent BondBloxx literature, this asset class “provides compelling after-tax relative value, and we recommend increasing allocations to this sector.”
A significant portion of TAXX assets is also invested in taxable short-duration bonds. The diverse range of fixed income assets within the fund’s portfolio presents ample opportunities to secure after-tax returns.
TAXX’s fund managers utilize a disciplined, bottom-up approach to security selection. Potential portfolio additions must undergo rigorous fundamental credit analysis, possess liquidity, and offer strong after-tax relative value. This strategy aims to build a diversified, high-quality portfolio of fixed income instruments.
Within TAXX’s portfolio, the majority of assets have maturities ranging from less than a year to three years. This shorter maturity helps investors capture returns while mitigating volatility from potential long-term rate changes.
TAXX’s strategy is already delivering impressive tax-efficient returns. As of May 31, 2024, the fund has achieved a tax-equivalent yield of 6.11%. Launched just over three months ago, the fund has already attracted over $39 million in assets.
This fund demonstrates how investors can achieve both after-tax returns and asset diversification within a single fixed income portfolio. With an active management team guiding it, TAXX is well-positioned to navigate interest rate fluctuations and credit spreads to provide investors with yield and capital preservation.
This version emphasizes the strategic considerations for investors and highlights the opportunities presented by BondBloxx’s various ETFs in a professional and informative manner.
