Fixed Income ETF Strategies Following Fed's Interest Rate Hike

SPEAKER_1 (0:01)

Time now for our ETF Watchlist segment. Joining me right now, Lance McGray, Head of ETF Product Advisors Asset Management here. And we just were talking about some of the yields that we've been seeing.

Oil, of course, is moving. How things are happening here with inflation expectations going forward. But the Fed rate hike made it solid, at least one 25 basis point hike and maybe more to come. What are some of the takeaways here in the ETF world when you see rates that have been a bit higher for longer?

Lance McGray (0:33)

Yeah. Hey, Nicole, thanks for having me as always. I think the major takeaway here is that income is back, right? It's been a decade, maybe even two decades, where investors really had to take on a tremendous amount of equity risk or credit risk or even duration risk to get meaningful income. And with the 10-year around 5 percent or just around there, it provides a lot of options for investors, especially those that are looking for income solution. So it's really been an interesting opportunity for those investors to sort of look at their portfolio.

Where can I add a little exposure here to elevate my income? But more importantly, you mentioned higher for longer. We expect elevated levels of volatility and we expect a different game plan going forward. I think fixed income ETFs is a great place to start.

SPEAKER_1 (1:30)

And when we think about the volatility that we've been seeing, whether it's in a little bit of everything, right? And the liquidity, the transparency, that's something that you're focusing on as well when you talk about fixed income ETF growth, that it is attractive and can sort of navigate through all that.

Lance McGray (1:49)

Yeah, what's really interesting is as rates have gone higher, we've actually seen it not suppress flows as much. To be honest with you, we have over a thousand fixed income ETFs in the US listed marketplace right now. And almost for every $1 that comes into ETF flows, or every $3 that comes into ETF flows, $1 is coming into fixed income instruments. So it's really interesting that high elevated levels of income, higher interest rates, investors are looking for the ETF wrapper to find that and source that income.

SPEAKER_1 (2:25)

Let's get a little bit in depth here with the floating rate exposure and the products that you offer. Tell us a little bit about one or two of the products.

Lance McGray (2:36)

Yeah, absolutely. We'll stick in the fixed income arena, because within the last year or two, we've made it a focus of ours here at AAM to really go after and create unique differentiated income producing solutions that investors can utilize on their fixed income side of their portfolio. Most recently, we launched the AAM Crescent CLO ETF, and this is a product that's 18 basis points. It provides institutional type exposure to the CLO market.

Again, an asset class that provides very attractive levels of income from the CLO, but also these are floating rate vehicles, so they have very little duration. So if you pair a 6 percent yield with roughly a zero duration, it's a very, very attractive. And then you pair that with an active manager, a $50 billion credit manager in Crescent, and you're bringing the best of everything. An active manager with a strong back record, a very user-friendly asset class, and most importantly, a very efficient wrapper. The second one I think investors are really flocking to right now on the AAM side is the AAM SLC low-duration income strategy. It's a gold medal performer by Morningstar. It's been out in the market for about two years. It's a short duration active strategy managed by our affiliates at SLC that really focus on securitized assets. And it's an access story.

It's a product for investors that are looking to get outside of cash, one elevated levels of income, but certainly don't want to take on additional credit risk. And it's an investment-grade only solution at 15 basis points. So very, very interesting, attractive, fixed income active strategy for the current environment that we're in.

SPEAKER_1 (4:27)

All right, Lance McGray, Head of ETF Product Advisors Asset Management. Lance, great to see you. Thank you so much for all of that.