It’s been a promising year for those engaged in both high-yield and investment-grade corporate debt. As of September 26, the two largest ETFs in these sectors have seen an average increase of 7% year-to-date.
However, this does not imply that further upside is limited. In fact, ETFs like the Neuberger Berman Flexible Credit Income ETF (NBFC) are particularly appealing for income investors right now. This attractiveness goes beyond the anticipation of several more interest rate cuts from the Federal Reserve.
As its name suggests, NBFC is flexible. Launched in June 2024, this actively managed ETF holds a diverse mix of investment-grade and junk debt, with a stronger emphasis on the latter. Nevertheless, the fund’s exposure to higher-quality corporate bonds should not be overlooked, as these investment-grade securities currently offer enticing yields.
Yield Opportunities Abound
NBFC boasts a 30-day SEC yield of 6.39%. While this figure is impressive on its own, there’s more to consider. A portion of NBFC’s yield is derived from investment-grade bonds, which are generally offering higher-than-average yields at this time.
“Investment-grade corporate bonds are also sitting near the top of their range for the last 15 years. To put this into perspective, average yields on these securities with intermediate-term maturities currently fall in the neighborhood of 4.25% to 5.50%,” according to Charles Schwab.
It’s important to remember that bond prices and yields move inversely. Historically, the higher a bond’s yield at the time of purchase, the lower the buyer’s chances of success. This makes NBFC’s relatively elevated yield appealing, as it suggests potential for downside, indicating that the ETF’s holdings could appreciate in value.
“Importantly, today’s yields on investment-grade corporate bonds may be good indicators of their future total returns. This makes investment-grade corporate bonds an appealing option for investors who are particularly concerned about how their bond portfolio may perform when the future path of interest rates is at least somewhat unknowable,” Schwab added.
Advisors and investors considering NBFC should keep in mind that history doesn’t always repeat itself. However, fixed income history does confirm a significant relationship between the starting yields of investment-grade corporate bonds and their future performance.
“This relationship may provide some comfort for bond investors who are looking for yield but are unsure about what the future might bring,” Schwab concluded.
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