Why I'm Adding Quality Bond Funds To My Income Portfolio

seekingalpha09-06

The current economic backdrop and market conditions are favorable for quality bonds, making quality and duration bond funds ideal for my income portfolio repositioning and shifting to 60% bond holding...

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I am reversing my portfolio 60/40 to 40/60 with 60% on fixed income bonds and may go to higher weight in the bonds depending on the future economy. Quality bond funds are my top choices. I expect the quality bonds ETF to embrace FED And Inflation tailwinds in the remainder of 2024 and outperform. At the same time, I am collecting the awesome high-yield income and wait to see how these holdings will play out in the coming months. BUY #1 Safer and High Yield GBAB Guggenheim Taxable Municipal Bond & Investment Grade Debt Trust  is a Muni CEF managed by Guggenheim. This is my continuation of Muni positions but with taxable Muni bonds. The fu","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"TLTW":"iShares 20+ Year Treasury Bond Buywrite Strategy ETF","BK4585":"ETF&股票定投概念","BK4581":"高盛持仓","TLT":"20+年以上美国国债ETF-iShares","GBAB":"Guggenheim Build America Bonds M","BK4588":"碎股","BK4550":"红杉资本持仓","FDN":"First Trust Dow Jones Internet I","SDHY":"PGIM Short Duration High Yield Opportunities Fund","PTBD":"Pacer Trendpilot US Bond ETF"},"translate_title":"为什么我将优质债券基金添加到我的收入投资组合中","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TLTW":1,"US7Y.BOND":1,"US6M.BOND":1,"US5Y.BOND":1,"US3Y.BOND":1,"US30Y.BOND":1,"US2Y.BOND":1,"US12M.BOND":1,"US10Y.BOND":1,"TLT":1,"SDHY":1,"PTBD":1,"GBAB":1,"FDN":0.9,"US912797HE00.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6},"content_text":"The current economic backdrop and market conditions are favorable for quality bonds, making quality and duration bond funds ideal for my income portfolio repositioning and shifting to 60% bond holding.I prefer quality bond funds for their liquidity, flexibility, and high yield, providing a solid foundation amid economic and market uncertainties.I will show my top choices and reasons to construct a quality income portfolio with a target 8% yield and expect performance gain when the predicated FED and inflation tailwinds materialize.I am Wise Bull, an active SA writer with a focus on income funds and income-driven portfolios. I have been an active investor for the last 5 years with a total of over 20 years of investment experience.   Funtap I have been covering a few bond funds in the last few months in SA. At the same time, I have been increasing my \"BUY\"-rated holdings in my income portfolio. I still have a good portion of income investment in the very short-duration vehicles, with yields of about 5.5% on average. I am in a process of replacing these with the quality credit (better than investment grate), longer durations and ideally higher yield bond funds. Furthermore, I have filled my Muni fund allocations, I will show my other choices and explain why these are the top considerations in this article. I view the current economic backdrop as favoring \"higher quality and longer duration\" bonds in general. Inflation is cooling off slowly and the first FED rate cut is coming in mid-September, followed by a possible rate cutting cycle. At the same time, there are more signs indicating a slow economy ahead. A soft landing is no longer a sure thing, with \"stoking recession fears\". The defensive plays are the good bet under the current macro conditions. My top choices for \"going defensive\" are quality and high-yield bond ETFs and CEFs. The market backdrop also looks friendly to the bond market. The board markets have been toppy since August. The CBOE Market Volatility Index (VIX) had a few rapid spiking moves and has been sitting above its 200-day moving average since. Where would money go if investors are highly nervous about the equity market? I think the equity market will continue its pullback in September and October, two of the historically worst performing months, which will benefit bond investors greatly. I am reversing my portfolio 60/40 to 40/60 with 60% on fixed income bonds and may go to higher weight in the bonds depending on the future economy. Quality bond funds are my top choices. I expect the quality bonds ETF to embrace FED And Inflation tailwinds in the remainder of 2024 and outperform. At the same time, I am collecting the awesome high-yield income and wait to see how these holdings will play out in the coming months. BUY #1 Safer and High Yield GBAB Guggenheim Taxable Municipal Bond & Investment Grade Debt Trust (GBAB) is a Muni CEF managed by Guggenheim. This is my continuation of Muni positions but with taxable Muni bonds. The fund pays an 8.49% dividend in monthly distribution. The yield is more or less comparable with some of the tax-exemption Muni funds I have already. I am very conformable with the position in my IRA account, so I actually do get the tax benefit. This CEF has an expense ratio at 1.51%, which is a bit higher than the other CEFs and offsets the yield a bit, about 0.5%~1% based on my estimation. The fund uses leverage around 23%, which is lower than the CEF average. The fund has a mixed portfolio of Municipal bonds (53.17%) and Corporate bonds (36.92%) with an average crediting rating A- over the total of 369 bonding holdings. It is a safer portfolio than the investment grade portfolio. I see it having a good balance between the high-yield and high credit. GBAB currently trades at the NAV premium of 10.46% near its 52-week-high, making it less attractive in pricing. I have a partial position for locking in the yield and plan to wait for a dip to buy more if possible. BUY # 2 TLT/TLTW for core holdings iShares 20+ Year Treasury Bond ETF (TLT) is the most popular long duration Treasury bond market proxy. It has a market cap north of $62B and huge trading volume at 36.5M in daily average. TLT has an average credit rating AA over its 98.46% of government long treasury bonds with an effective duration of 16.46 years. I also have iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW) included as a combined selection, which I use as the core holdings. Readers can refer to my recent write-up for more details about why these are my core holdings. TLT yields 3.68% which is less than half of my target income yield (8%). I am pumping the yield up by holding TLTW positions. TTLW is the covered call ETF for TLT. I use TLTW to free myself from the major work of DIY option trading to augment the income from the TLT option market, which is also highly popular. TLTW has a monthly distribution at 15.14% yield. I have about 1/3 bond allocation, starting with an equal split of TLT and TLTW. The combo has given me about 9% yield on average. I currently hold twice as more TTLW to bump up the overall yield. Note, investors could adjust the weights according to their own income requirements. I have found it convenient to rebalance the two positions, an operation that has been very easy to perform under their current market conditions. Keep in mind, TLT is trading at a ten-year low, with both 3-year and 5-year running losses topping 30%, thanks to the rapid rate hiking. I am expecting the rate cut cycle will help TLT to regain some of the loss along the way. I am considering increasing my positions on this combo to 50% of my income portfolio. BUY # 3 trend-following bond ETF PTBD  Pacer Trendpilot US Bond ETF (PTBD) is a trend-following bond ETF. It is a unique ETF for its strategy, described as \"strategically and tax-efficiently alternating its exposure between high-yield corporate and U.S. Treasury bonds while aiming to mitigate risk.\" The current 13 holdings are 99.35% in Treasury bonds, reflecting the outperforming Government bonds over the Corporate bonds in its current observed cycle. I view it as a confirmation of the market trend that favor the quality and duration. PTBD has an overall credit rating averaged at A- with an effective duration of 6.54 years. It is a relatively new bond ETF incepted on October 10, 2019, with a market cap of $168.22M. Some investors have been skeptical about the effectiveness of the strategy in determining the right times for switching between high yield Corporate bonds and Treasury bonds, resulting in subpar price performance. But the fund is paying an impressive distribution with a yield at 7.24%. I believe the subpar performance is largely due to the big drawdown in the Long bond market in 2022. The ETF was born at the wrong time, but still, it has been doing better than TLT during its short lifetime so far. The timing (or lagging indicator) issue is not critical for my consideration of income holdings, as long as PTBD can identify the stable trend correctly. This ETF has a relative low risk (with much lower volatility than TLT) and a high-yield close to my target (8%). It will be good holding for me and can be used as a supplementary to the TLT/TLW combo. I also plan to use it as a \"live\" monitor for the cycle when the Corporate bond will become \"outperforming\". BUY #4 SDHY not needed for inflation hedge. But the nav discount and term PGIM Short Duration High Yield Opps (SDHY) is a CEF focusing on the high yield \"junk\" Corporate bonds. Its bond portfolio has 79.51% in Corporate bonds totaling 472, with a targeted credit grading B+. This is the lowest credit grade in my portfolio. However, the portfolio itself is considered as conservative and diversified in this type of asset class. It is an \"anomaly\" in my current income portfolio which is focusing more on the quality and duration as indicated in this article. On the other hand, I started a Strong Buy on this one about 4 months ago, and the fund has gained 9.48% in total return since my coverage. I intend to downgrade the Strong Buy rating, but still keep the rating as Buy. The main reasons to Buy (I'm holding my shares) include the 8.06% yield and the diversification in the portfolio. The shares are still buyable for its 9.36% NAV discount, which has been narrowed down from 12.55% at my initial rating. The current NAV discount offers a comfortable buffer to wait for the eventual NAV reverting event in 2029 when this term fund will, by design, liquidate at NAV for termination. I plan to write a separate article about my rating change on SDHY and detail my analysis on the Corporate bonds soon.   Takeaways  I continue to favor funds including CEFs and ETFs for bond investment due to the accessibility, flexibility and liquidity. The fund portfolios provide a great foundation for stable HY income streams. The current economic and market backdrops have created perhaps highly favorable conditions for quality bonds with longer durations. I have shown my top choices of the bond funds for my income portfolio repositioning. I am aware of the risks involved with the future uncertainty in the US economy and the presidential election in November. After all, these are quality income yielders, it's perfectly fine to collect (8% yield) income and wait to see how the rate cutting cycle will roll out. This is why I prefer ETFs and CEFs with quality bonds, liquidity (for changes), price advantages and high-yield income.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2465578546"}