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Diversify a Fixed-Income Portfolio with Alternative ETFs


After another rush to bonds this year, some argue that debt assets are beginning to look less attractive. Instead, fixed-income investors can consider alternative assets and related exchange traded funds to get their yield fix.

“There’s just no value in the bond market,” Jeffrey Kleintop, LPL Financial’s chief market strategist, said at the Investment Management Consultants Association’s annual meeting, reports Gregory Crawford for InvestmentNews. “By and large the bond market is over.”

Kleintop argued that investors should think about diversifying their portfolios with alternative fixed-income assets, like bank loans, real estate investment trusts, master limited partnerships and business development companies.

While these assets are riskier than traditional investment-grade bond plays, the alternative assets provide returns that show a low correlation to equities, which help a portfolio zig when the stock markets zag.

For instance, the PowerShares Senior Loan Portfolio (BKLN)  - a floating-rate, high-yield, senior loan ETF, and one of the most popular ETFs of 2013 – provides attractive yields and hedges against changes in interest rates by resetting, or floating, its interest rate to periodically match the market. BKLN has a 4.35% 30-day SEC yield and its floating component resets an average 50.98 days.

Broad REITs ETFs have also been strengthening as benchmark 10-year Treasury yields dipped about 40 basis points so far this year. The Vanguard REIT ETF (VNQ) has gained 15.4% and iShares Dow Jones US Real Estate Index Fund (IYR) rose 13.9% year-to-date. VNQ has a 2.79% 12-month yield and IYR comes with a 3.68% 12-month yield. [REIT ETFs Strengthen on Recovering Economy]

Investors interested in a fixed-income option with exposure to the rapidly expanding U.S. energy sector can take a look at MLP exchange traded products, such as the UBS ETRACS Alerian MLP Infrastructure ETN (MLPI) , which has a 4.47% 12-month yield. [An ETN Option for MLP Investors]

BDCs are high-dividend-paying firms that focus on lending senior secured loans to midsized companies. While they offer high yields, these companies have weakened this year after being de-listed from large small-cap indices. The Market Vectors BDC Income ETF (BIZD) has dipped 4.8% year-to-date while the E-TRACS Wells Fargo Business Development Index ETN (BDCS) is down 4.3%. BDCS shows a 7.51% 12-month yield and BIZD comes with a 6.43% 12-month yield. [BDC ETFs Weaken as Russell Joins S&P in Giving Companies the Boot]

“The thing I want people to do in fixed income, most importantly, is look at what they own,” William Eigen III, manager of the JPMorgan Strategic Income Opportunities Fund, said at the annual conference, reports Jeff Benjamin for InvestmentNews. “Be more diversified than I think you are, because it’s one of the most dangerous times in history now to just hold beta.”

For more information on income options, visit our dividend ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.