Sharpen up on HYIN for alternative income

OEven though the Federal Reserve is expected to raise interest rates soon, these rates are still low by historical standards, and even when the rate hikes arrive, government bond yields will remain low in absolute terms.

In other words, advisors are always trying to find sources of return for clients in need of income. With that in mind, now is a good time to consider other revenue streams – an approach available in broad form through the WisdomTree Alternative Income Fund (HYIN).

HYIN, which tracks the Gapstow Liquid Alternative Credit Index, debuted last May and is a yield enthusiast’s dream come true, as highlighted by a jaw-dropping 30-day SEC yield of 8.66 %, according to the data of the issuer. The cornerstone of HYIN’s revenue-generating capabilities is what is known as the alternative. For investors unfamiliar with this concept, it is easy to understand.

“These are debt-based instruments that have a higher yield and/or expected return than higher-quality fixed-income securities,” says Kevin Flanagan, head of fixed income strategy at WisdomTree. “It includes a range of securities across a broad universe of borrower segments, such as households, corporates and commercial real estate. The three main segments of alternative credit are business development companies (BDCs), fixed capital (CEF) credit-centric and mortgage real estate investment trusts (REIT).

HYIN’s lineup currently consists of 35 BDCs, closed-end funds and mREITs, with weightings ranging from 2.49% to 3.18%.

“BDCs lend to small and medium-sized businesses and typically invest in senior secured floating rate senior loans that are issued to private companies. CEFs are pooled investment vehicles that invest in high yield bonds, heavily syndicated leveraged loans, secured loan obligations, residential and commercial mortgage-backed securities (MBS) and certain assets of private credit,” adds Flanagan.

Specific to BDCs, this asset class could prove fruitful for HYIN investors as interest rates rise, as the bulk of lending by these companies is in the form of floating rate notes (FRNs). ), a corner of the bond market that benefits when rates rise. .

As for HYIN’s real estate exposure, that too is potentially useful in the current environment, as REITs have pricing power, making the asset class a favored inflation-fighting vehicle. It should be noted that alternative credit can be more volatile than traditional income-generating assets, but as HYIN shows, investors are compensated for this risk with a high return.

“In this environment of impending Fed rate hikes, rising inflation and historically low interest rates, investors face a conundrum when looking for yield. Investors can consider HYIN as a solution on this front to serve as a complement to their current asset allocations,” concludes Flanagan.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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