While remarkable runs by tech-driven active equity ETFs have caught the attentions of investors over the past six months, active taxable fixed-income ETFs may have an opportunity of their own to shine, according to one manager.
That’s because returns in the taxable bond space will hinge on security selection as 2021 unfolds, said Jim Jackson, head of fixed-income portfolio management at San Antonio, Texas-based USAA Investments, a franchise of Victory Capital, but managers need to be willing to look beyond corporate bonds.
“This is going to be a year of coupon clipping,” he said. “Bond investors will earn the coupon, and we expect the credit environment compared to 2020 to be less volatile—you could even describe it as benign on a relative basis.”
Now a part of Victory Capital, USAA Investments offers a pair of active fixed-income ETFs, the VictoryShares USAA Core Short-Term Bond ETF(USTB) and the VictoryShares USAA Core Intermediate-Term Bond ETF (UITB).
Through 2021, USAA Investments expected overall credit spreads to tighten, said Jackson, and income to become the primary driver of corporate bond returns.
“A lot of that convergence, instead of happening gradually this year, actually happened in December. The levels of dispersion decreased by a quarter—so a lot if what we originally posited for 2021 based on our expectations occurred over an accelerated timeframe,” he said
Regardless, Jackson still believes that income will drive returns in 2021 as rates stay low and access to the markets remains high. There might not be much additional credit spread tightening, but there isn’t likely to be much additional widening out, either.
That makes corporate credit more attractive than Treasury bonds on a risk-adjusted basis, said Jackson.
“The yield advantage for credit over Treasury bonds will hold out,” he said. There is a two-times relative yield advantage for broad aggregate credit indexes versus Treasurys, he said. “When you have a global environment where a quarter of the global aggregate index has a negative yield, there’s strong technical support for yield-driven investing.”
USAA’s ETFs and mutual funds have duration and risk mandates, so Jackson’s teams avoid taking on credit risk to achieve yields. Instead, they look across asset classes.
“Where we’ve been adding recently is on the taxable municipal space,” he said. “Taxable munis are generally priced tighter than the equivalent-rated corporate bonds, but recently they’ve been wider and we’ve been adding.”