The traditional approach to fixed income is undergoing a sophisticated evolution. While core aggregate benchmarks remain the bedrock of many fixed income portfolios, advisors are increasingly looking to complement these holdings with specialized income alternatives. According to recent VettaFi survey data, over 80% of advisors are looking to add specialized income satellite positions to their portfolios in the second quarter.

Key Takeaways

• Rather than replacing bonds, 35.8% of advisors are using options-based ETFs to dampen volatility and enhance total yield.
• Professional interest in the PIMCO Intermediate Municipal Bond Active ETF (MUNI) highlights a shift toward active, tax-efficient core-plus strategies.
• AAA-rated CLOs and municipal strategies can help maintain high credit quality while diversifying away from standard Treasury risk.

Expanding the Fixed Income Toolkit With Alternatives

The move toward income alternatives isn’t a retreat from fixed income — it should be viewed as an expansion of it. For many advisors, the JPMorgan Equity Premium Income ETF (JEPI) or the NEOS S&P 500 High Income ETF (SPYI) serve as a yield bridge. Advisors can use SPYI to generate high monthly distributions that complement the lower coupons of traditional bonds, effectively lowering the overall duration risk of the total portfolio.

The Role of Active Munis in a Core Strategy

Tax-efficient strategies have become increasingly mainstream. Notably, 25.4% of advisors are looking to increase exposure here during the current quarter.

While the Invesco Intermediate Municipal ETF (INTM) provides a solid passive foundation, the PIMCO Intermediate Municipal Bond Active ETF (MUNI) is frequently cited by advisors as a premier core-plus tool. As the municipal market is notoriously fragmented, PIMCO’s active approach allows advisors to source income from diverse regions and sectors that a standard index might miss. This active oversight helps MUNI serve as a powerful, tax-advantaged anchor for a modern fixed income sleeve.

CLOs: Diversifying Credit Exposure

Collateralized loan obligations (CLOs) offer another layer of protection, particularly through their floating-rate nature. 19.4% of advisors are eyeing this space to complement their fixed-rate bond holdings.

The Reckoner Yield Enhanced AAA CLO ETF (RAAA) offers a unique yield enhanced approach by applying modest leverage to the highest-quality tranches of the CLO market. For advisors who want the same high-credit exposure without the leverage, the Janus Henderson AAA CLO ETF (JAAA) serves as a liquid peer. Both funds allow advisors to maintain a high-quality credit profile while reducing the rate sensitivity inherent in traditional aggregate benchmarks.

Building a Portfolio Utilizing Both Core Fixed Income & Income Alternatives

This trend reflects a broader shift in the fixed income landscape. By blending traditional bonds with these income alternatives, advisors can address specific client pain points — like tax drag or inflation — without abandoning the safety of the bond market. For instance, the combination of MUNI for tax-free stability and SPYI for enhanced cash flow creates a balanced profile that can weather various interest rate environments.

Ultimately, the recent VettaFi data proves that the modern advisor is moving beyond traditional fixed income core allocations. Advisors are increasingly utilizing sophisticated tools to ensure that the fixed income portion of the portfolio remains both defensive and productive. In an era where core is no longer enough, these alternatives provide the necessary toolkit to build truly resilient, multi-dimensional income streams.

Originally published on Advisor Perspectives

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