Last year’s “transient” inflation is this year’s persistent problem and the Federal Reserve has shifted accordingly, lifting the Federal Funds rate from near zero to a range of 2.25-2.5%, likely on its way to 3.0% or better. This was the fastest rise in the benchmark since the Fed began using Fed funds as its target in the early 1990s (Wall Street Journal, August 26). Yields on the 10-year treasury have gone from around 1.7% to start the year to more than 3.1% in late August. And it now looks like rates will be higher, for longer, based on Fed Chair Powell’s remarks at Jackson Hole in late August (Bloomberg, August 26).
When yields rise, bond prices fall, but there is a silver lining to this for those who reinvest all or part of the income generated by their fixed income holdings: a decline in bond prices provides an opportunity to lower the average cost of their portfolio. In a market defined by steadily rising rates, reinvesting into an ETF or other bond portfolio at the lower prices can lift the effective yield over time. Should bonds rally and yields then decline in the future, the additional shares acquired through reinvestment appreciate along with the rest of the portfolio.
But not all bond funds are the same, nor do all types of bonds necessarily move in lock step with Federal Reserve policy. Different fixed income sectors may have different sensitivities to rising rates. An actively managed, multi-asset fund like our recently introduced IQ MacKay Multi-Sector Income ETF (MMSB) seeks to take advantage of these inefficiencies to maximize income and provide attractive risk-adjusted returns.
There is a view that the decline in the bond market has resulted in valuations that are meaningfully more attractive and current yields that have a greatly improved ability to generate income potential. That’s a by-product of a bond selloff that Bloomberg and others have called “historic” (Bloomberg, July 6) and that seems to have signaled an end to what has been, with a few interruptions, a 40-year bull market in fixed income.
No one knows where the bond market will go from here, but what we do know is this: it’s now possible for investors to generate income from a diversified portfolio of fixed income instruments, with even “flight to safety” U.S. treasuries yielding around 3.0% as of this writing. Further, should rates continue to rise, a strategy of all or partial reinvestment has the potential to allow the income generated by the portfolio to rise over time as well.
Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
Click on the fund name for the most current fund page, which includes, the prospectus, investment objectives, performance, risk, and other important information. Returns represent past performance which is no guarantee of future results. Current performance may be lower or higher. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Visit nylinvestments.com/etfs and nylinvestments.com/funds and for the most recent month-end performance.
The Fund is a new fund. As a new fund, there can be no assurance that it will grow to or maintain an economically viable size, in which case it could ultimately liquidate. Funds that invest in bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk which is the possibility that the bond issuer may fail to pay interest and principal in a timely manner.
High yield securities generally offer a higher current yield than the yield available from higher grade issues, but are subject to greater market fluctuations, are less liquid and provide a greater risk of loss than investment grade securities.
Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities. These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. These risks may be greater for emerging markets.
Short positions pose a risk because they lose value as a security's price increases; therefore, the loss on a short sale is theoretically unlimited. The fund may invest in derivatives which may amplify the effects of market volatility on the Fund’s Share price.
Certain environmental, social, and governance ("ESG") criteria may be considered when evaluating an investment opportunity. This may result in the Fund having exposure to securities or sectors that are significantly different than the composition of the Fund's benchmark and performing differently than other funds and strategies in its peer group that do not take into account ESG criteria. There is no assurance that employing ESG strategies will result in more favorable investment performance
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
This material contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.