TOM LYDON: Hi, I'm Tom Lydon here in San Diego at the Charles Schwab IMPACT Conference, here with Kol Estreicher, ETF Specialist with VanEck. Great seeing you, Kol.
KOL ESTREICHER: Likewise, Tom. Thanks for having me.
LYDON: There's a lot of challenges for investors and advisors today in this low-yield environment. Walk us through some of the things you're thinking about at VanEck, maybe some strategies advisors might consider.
ESTREICHER: Income in this environment may appear to be challenging. If you look at where the 10-year yield was a year ago today, it was about 140 basis points higher. So investors have to be feeling the effects of reinvestment risk now that coupon yields aren't nearly as compelling as they once were. But we don't think this low interest rate environment is indicative of a recession. Sure, you can point to some intermediate- or longer-term headwinds, but for the most part economic conditions are relatively benign and we have an accommodative Fed [U.S. Federal Reserve] that seems fairly well-committed to telegraphing the policy path. So that should help neutralize a lot of that price volatility associated with a rising interest rate environment, in an unexpected rate environment as well. So, within that framework, we think investors can look to incorporate more credit or more duration risk in their portfolios, so they don't have to be too conservative and risk leaving money on the table.
So, a couple of fixed income asset classes to keep in mind. You could look at high-yield corporates, high-yield munis, emerging markets debt and there may even be ESG [environmental, social and governance] solutions that could be viable for portfolios. And then on the equity income side, high-dividend strategies, no shortage of ideas there. But investors need to be careful and take a look under the hood to understand what you own. And then preferred securities, that could be another place to add some incremental yield to the portfolio. We think adding those strategies or asset classes inside the ETF wrapper can add an element of diversification into the portfolio, ultimately reducing total risk.
LYDON: So when you talk about all these options outside of the Barclays Agg [Bloomberg Barclays US Aggregate Bond Index], it's not too risky at this point in time where the Fed isn't all to go out on duration or even go outside the U.S., right?
ESTREICHER: Correct. Yeah, so a couple ideas. We run an ETF, fallen angels [VanEck Vectors® Fallen Angel High Yield Bond ETF (ANGL®)]. It tracks an often-overlooked subset of the high-yield marketplace. The ETF looks at the Bank of America Merrill Lynch fallen angel index [ICE BofAML US Fallen Angel High Yield Index (H0FA)] and that index has actually outperformed broad market high yield in 11 out of the previous 15 years and is up over 200 basis points year-to-date due to three unique characteristics inherent to fallen angel bonds. So you have this forced selling behavioral phenomenon associated with the downgrade process, meaning that money managers or strategists with an investment-grade mandate can't hold junk and have to exit their positions.
ESTREICHER: Second, you have sector themes and sector differentiation relative to broad market. And third, you have a higher credit quality component, which really helps to insulate angels relative to broad market high yield during those periods of extreme spread widening.
LYDON: A-N-G-L, correct?
ESTREICHER: A-N-G-L, correct.
LYDON: Excellent. Kol, great seeing you. Thank you.
ESTREICHER: Yeah. Thanks very much, Tom.
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