While advisors can do their own due diligence to invest in stand-alone structured products, they also can consider packaged product versions of these strategies, such as the iShares CMBS ETF (CMBS), which seeks to track the investment results of an index composed of investment-grade CMBS.
“Advisors should also consider how the underlying portfolios for CMBS and CLO, which could contain both fixed- and floating-rate instruments, might perform in a gradually rising interest rate and slow economic growth environment in comparison to other available products or strategies to help meet their growth or income objectives,” said Walsh, who advises 20,000 clients in New Jersey and Florida.
If there is an unexpected downturn in the U.S. economy, the main option for policy makers is quantitative easing (QE) or negative interest rates. However Tipp said QE has not been a policy that the Fed has liked or seen as cost effective. The Fed ended QE in October 2014.
“If you’re in an environment where the central bank is trying to stimulate the economy but they are charging banks and hurting their earnings profiles, there is a conflict there,” Tipp said. “The Fed would much rather have higher interest rates to begin with so that they can cut in an emergency.”
Even though U.S. interest rates are already incredibly low, they remain attractive relative to the rest of the developed world.
“Another round of QE on the part of the European Central Bank will only serve to drive competing interest rates lower, meaning that there is effectively a ceiling on U.S. rates,” McDonough told Financial Advisor.
The European Central Bank left its benchmark refinancing rate steady at a record low of 0.05% and put its asset purchase program on hold on January 21.
Meanwhile, McDonough believes that investors should retain a strategic allocation to high yield through an actively managed, higher-quality mutual fund.
“We have also lengthened duration to at least match the Barclays Aggregate Index, which is currently about 5.5 years, as we believe that interest rates, especially longer-term rates, are beholden to the bond market’s view of slowing global growth and risk aversion, and therefore will not be moving upwards significantly over the near- to intermediate term,” she said.