Take the guesswork out of trying to manage a high yielding portfolio. VanEck’s Dynamic High Income ETF (INC) offers professional management designed to help investors navigate the underlying risks associated with high income investing. INC incorporates a three-step portfolio management process in order to generate a tactical, risk-managed portfolio of high income-generating assets. This blog is intended to address frequently asked questions about high income investing and INC.
Why invest in high income?
The high income sector of the market is attractively priced as valuations have dipped with the recent market selloff. While this has been happening, yields on these securities have continued to increase as the Federal Reserve (Fed) continues to raise rates in their effort to ward off inflation. The result: real yields on many income generating securities have turned positive in 2022.
In addition, the U.S. high yield default rate has fallen to its lowest level since 2001. The default rate was 0.3% in the first quarter of 2022, according to Fitch Ratings. Fitch Ratings also released their projections for 2023 and 2024 of 2.5%-3.5% and 3.0%-4.0%, respectively. This falls well below the average rate of 5.2% in the 2020s.
Attractive valuations, positive real yields and a low default rate make high yielding securities very appealing.
Why an active approach to high income investing?
Waning valuations in recent months may cause yields to appear more attractive, but just because the yield is high doesn’t make it a good buy. An actively managed solution from VanEck’s Quantitative Investment Solutions group can help investors avoid yield traps and potentially enhance the quality of high yielding investments.
Active management can also help investors navigate turbulent capital markets. By tactically shifting allocations, the portfolio management team may be able to enhance downside protection as well as upside participation.
Why does INC make sense for investors in the current environment?
We believe, now more than ever, value has returned to the income markets, and active management may be an essential part of successfully navigating the variety of ways investors can source a high level of income. In periods of volatility, research, diversification and risk management offer the potential for more consistent returns and better risk-adjusted return.
How does INC’s tactical approach work?
The VanEck’s Dynamic High Income ETF (INC) incorporates a three-step portfolio management process. First, it seeks to identify unique sources of yield among high income generating ETFs. Second, it seeks to optimize the portfolio to maximize yield per unit of risk. The third step involves a process to bias the portfolio towards the top performing assets and take advantage of pricing anomalies within the market. The result is a dynamic and risk-managed portfolio of high income generating assets.
Source: VanEck.
What kind of high-income securities does INC hold?
INC currently holds ETFs with the following exposures:
- Fallen angel high yield bond
- International high yield bond
- Emerging market high yield bond
- Emerging market local currency bond
- US high equity dividend
- Preferred securities
- Business development companies
- Energy equity income
- Mortgage REITs
The fund also currently holds US Treasury bonds.
How does INC select its underlying ETFs?
Exposures, liquidity and costs are key criteria used to select the underlying ETFs. INC is open-sourced, meaning it may use both third-party and VanEck ETFs. It may also hold physical fixed income securities—not just those packaged in an ETF wrapper.
How does the portfolio adapt to different economic regimes?
The portfolio management team developed a framework to identify segments of potential opportunity that consider a variety of market conditions. The chart below offers a simplified depiction of the adaptive process of the portfolio.
Source: VanEck.
Originally published by VanEck on 3 November 2022.
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