The Structured Credit Advantage: High Yields, Low Defaults

Considering how complex the macroeconomic picture has become this year, advisors and investors may want to consider any and all portfolio tools available to them. This certainly includes their approach to fixed income exposure, given how the challenges of inflation, new leadership at the Fed, oil prices, and more could affect income approaches of all kinds. 

Key Takeaways:

• Inflation, new Fed leadership, and much more is causing many to rethink how they position their fixed income portfolios, but structured credit could offer a good opportunity.
• Structured credit offers strong historical precedent for lower default rates, while generating compelling yields via complexity premiums.
• The Guggenheim Securitized Income ETF (GISC) provides disciplined access to a variety of structured credit assets, with the added benefit of active management.

One way folks could potentially look to navigate the fixed income market is through structured credit. The tradeable portion of the asset-backed finance market, structured credit encompasses a variety of different securities, including asset-backed securities, collateralized loan obligations, and mortgage-backed securities. 

Of course, some may be wondering why structured credit is offering a compelling use case for today’s environment. A major part of this has to do with how structured credit is offering attractive levels of yield that offset the potential risks. This is because, from a historical standpoint, investment-grade structured credit can offer a noticeably lower chance of default than other liquid areas of fixed income, such as corporate bonds. 

“Now, this matters, because unlike equities, which could go up or down, bonds generally can only go up a little bit and they can go down a lot,” said Karthik Narayanan, head of structured credit at Guggenheim Investments, in a June episode of the Guggenheim Macro Markets podcast. “So really, as a portfolio manager, what you want to get paid for is grinding out better returns over time and not giving it away very quickly on a few bad positions.”

Furthermore, structured credit is a valuable asset for taking advantage of the complexity premium. For the uninitiated, the complexity premium refers to the fact that investors tend to receive more payments because these securities are more difficult to navigate and manage. 

Active Structured Credit ETFs Offer a Compelling Opportunity Set

Put together, structured credit could offer a strong use case in today’s market. Blending lower default with higher income, these instruments, when selected correctly, can provide attractive yields to cushion against macroeconomic uncertainty. 

The Guggenheim Securitized Income ETF (GISC) can help investors looking to build up their exposure to structured credit. Seeking out strong yields through complexity premiums, GISC’s active portfolio team selectively pursues instruments from undervalued areas of the credit market. Meanwhile, the fund’s active framework enables it to flexibly readjust its exposures when needed.

This sort of approach could certainly pay off as the year progresses. Even if inflation continues to be a potent challenge, the opportunities within structured credit will persist, and active managers with strong track records may be able to capitalize on them. 

For more news, information, and strategy, visit the Fixed Income Content Hub.