Investors seeking yield amid an uncertain rate environment may overlook structured credit, a segment that performs well when the Federal Reserve’s next steps remain unclear.
Structured credit covers securities like collateralized loan obligations, or CLOs, which usually carry floating rates. This design protects them from the interest-rate volatility that hurts traditional bonds when the Fed changes policy.
The July consumer-price index report reduced some inflation concerns, sparking optimism that price pressures could ease without additional rate increases. Some Fed Committee members have pushed for a rate hike, but the report increased market optimism that inflation could moderate in the coming months. This mixed messaging keeps markets uncertain.
CLOs and similar structured credit securities adjust their coupons regularly, so their income climbs alongside short-term rates. This feature has maintained steady demand even as longer-duration bonds face challenges.
Guggenheim Investments introduced the Guggenheim Securitized Income ETF (GISC) to take advantage of this opportunity. The actively managed fund allows portfolio managers to adjust holdings across CLOs, asset-backed securities, and other structured credit areas as market conditions shift.
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The fund’s adaptability may prove useful if the Fed keeps rates raised for an extended period. Its 30-day SEC yield reached 5.18% as of July 31, 2023, reflecting the floating-rate nature of many assets, which increase payouts when benchmark rates climb.
Early results indicate the approach is effective. Since its launch, GISC has provided steady income while avoiding the volatility that has affected some fixed-income investments.
Even if inflation continues to cool and the Fed hints at rate cuts, structured credit could remain stable. Floating-rate securities often benefit from rate reductions, as they avoid the price drops that fixed-rate bonds experience when yields decline.
This ability to perform in both rising and falling rate scenarios makes structured credit an unusual strong point in a bond market where most assets react sharply to Fed decisions. Investors open to alternatives can find yield without predicting interest rate movements.
The ETF’s strategy carries risks. Structured credit can be complicated, and liquidity differs across sectors. However, for those accepting these trade-offs, the fund offers a simple way to enter the market without constructing a portfolio from individual securities.
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