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Income Investing Playbook 2024: Navigating the New Interest Rate Regime

October 15, 2024

Read Time 10+ MIN

Yields have reset higher across fixed income markets, leaving bonds well positioned in a range of different economic and interest rate scenarios in 2024.

Income investing is a strategy that aims to generate a steady stream of income from investments, typically through interest payments or dividends. Income investing is often favored by investors who prioritize regular cash flow. Income investments include a range of assets such as bonds, dividend-paying stocks, and real estate investment trusts (REITs). While income investing may offer less potential for significant capital gains, it can provide a reliable source of income and help diversify an investment portfolio.

Types of Income Investments

Below are three of the most common types of income investments:

  • Bonds: Fixed income securities issued by corporations, governments, or municipalities that pay a predetermined rate of interest to investors.
  • Dividend-paying stocks: Stocks of companies that pay out a portion of their earnings to shareholders in the form of dividends.
  • Real estate investment trusts (REITs): Companies that own and manage income-generating properties such as office buildings, shopping centers, and apartment complexes.

Opportunities for Income Investing in 2024

After a decade of extremely easy monetary policy, zero rates may feel like a baseline to some investors. However, it’s important to realize that 2022 marked the end of the “easy money” era and signaled a regime change in rates. The Fed’s recent round of rate hikes has simply brought treasury yields back to their long-term average, and investors who piled into bonds at the beginning of 2023 hoping to catch a quick reversal in rates are still waiting. We believe capturing opportunities in the current market environment requires a longer-term view.

Investors looking for a “trade” in 2024 shouldn’t expect rates to fall. That said, the good news for those with a longer-term view is that yields have reset higher across fixed income markets, which means bonds are well positioned in a range of different economic and interest rate scenarios. As we highlighted last year, when rates rise, investors benefit from higher yields, and indeed carry has come back to the fixed income market, leading current income to play a more significant role in bond returns. For example, at current yields, the income earned on the current 10-year Treasury note provides a return buffer even if rates continue to rise next year. As you move farther out the credit risk curve, the carry is even higher. This is enabling fixed income to be more resilient in the face of a wide range of potential market movements, including ones with even higher yields, credit spreads or volatility.

Of course, determining the right mix of income investments for a broader strategic allocation will depend on each investor’s individual risk appetite. In the sections that follow, we provide the resources you need to better understand the risk and opportunities across the income investing landscape.

Don’t Ignore Floating Rate Instruments

While the risk of rising rates has decreased with yields resetting higher, investments with less sensitivity to rate movements are still an important part of any broader fixed income allocation. Floating-rate instruments are an excellent way to gain exposure to the attractive short-term yields in the current market that remain significantly higher than longer term yields, while still maintaining protection if rates take a turn higher. In addition, interest rate volatility has remained elevated, and because the prices of floating rate securities are not impacted by movements in interest rates, they can provide meaningful diversification within a broader fixed income portfolio.

In our view, these are three compelling ways to gain exposure to floating rate instruments:

  1. Investment grade floating rate notes (FRNs)
  2. Collateralized loan obligations (CLOs)
  3. Business development companies (BDCs)

FRNs have coupons that are based on a short-term base rate such as the London Interbank Offered Rate (Libor) or Secured Overnight Funding Rate (SOFR), which reflect short-term funding costs, and an additional fixed spread that reflects the credit risk of the issuer. In the current “higher for longer” environment, investment grade corporate floating rate notes may continue to offer an attractive combination of enhanced yields and safety. The floating rate nature of FRNs means they have low or negative correlation to rate-sensitive fixed income asset classes, such as Treasuries or fixed coupon investment grade bonds. This may allow FRNs to fulfill two primary roles that fixed income can have within a balanced portfolio: income and diversification. Further, this is achieved without adding significant credit risk since the bonds carry investment grade ratings. This contrasts with leveraged loans, another floating rate asset class, which provide higher yields but with much higher credit risk.

We believe CLOs are a better way to access leveraged loans. A CLO is a portfolio of predominantly senior secured bank loans (aka leveraged loans) that is securitized and actively managed. CLOs are not just a hedge against rising rates. They also have historically provided higher levels of income for a lower level of risk – making a clear case for a strategic allocation. Over the long term, CLOs tranches have historically performed well relative to other corporate debt categories, including leveraged loans, high yield bonds and investment grade bonds. The ability to capture attractive opportunities throughout the CLO rating spectrum can provide attractive income and total return opportunities in different market environments. CLOs are structured to help mitigate risk, through the strength of their underlying collateral, active management, as well as built-in protections such as subordination coverage tests to correct collateral deterioration. This has historically helped investment grade rated CLOs experience significantly lower levels of principal loss when compared with corporate debt and other securitized products.

BDCs are another alternative high income source investors should consider when looking to enhance yield in their portfolio by tapping into private credit, which can otherwise be hard to access. BDCs generate income by lending to, and investing in, middle market companies. BDCs provide capital to small businesses, and in turn, give investors access the high income potential of middle market loans that are generally exclusive and difficult to access. While not without risk, BDCs have historically offered yields well above other high yielding asset classes.

Emerging Markets Remain Well Positioned

Emerging Markets Debt (EMD) offers a compelling investment case, particularly in the current global financial landscape. EMD's appeal lies in three main areas: First, emerging markets demonstrate stronger fiscal responsibility with lower debt-to-GDP ratios and higher yields compared to developed markets, making them a beacon of fiscal prudence. Second, historical performance data from 2003-2022 reveals that EMD, particularly in hard currency, delivers similar returns to U.S. High Yield but with half the volatility, suggesting it should be more prominently featured in strategic allocations. Lastly, EMD's liquidity, lower default rates, and recovery values challenge the perception of higher risk, revealing it as a potentially safer and more rewarding option than its developed market counterparts.

Dividend Investing: Stocks Generate Income, Too!

Dividend paying companies have been en vogue for much of the last 15 years as investors searched for yield beyond traditional income investments throughout the prolonged low-rate environment. As the tide turns and the market adjusts to elevated inflation, rising rates and increased market volatility, we believe it is best to focus on high dividend yielding U.S. companies with strong financial health and attractive valuations. This allows investors to gain exposure to high yielding companies, but hones in on those that have less of a likelihood of cutting their dividends and aren’t trading at excessive valuations.

Learn how to develop a dividend investing strategy that generates a steady stream of passive income. Follow these actionable tips and advice to start building your portfolio today.

Municipal Bonds Are a Staple of Any Income Allocation

In a slowing economy, municipal bonds stand out as an attractive investment for three key reasons. Firstly, they generally have higher credit ratings, with about 70% in the top two categories of the Bloomberg Municipal Bond Index, offering stability and low default rates even during recessions. Secondly, improved credit conditions are evident, as state and local governments possess robust rainy-day funds and sustained tax revenues, enhancing financial stability. Lastly, municipal bonds have historically shown positive returns post-recession, demonstrating resilience in economic downturns, with their performance being context-dependent. These factors collectively make municipal bonds a compelling option for investors seeking stable, secure investments during economic uncertainties.

Investment Grade Bonds Are Attractive…If You Know Where to Look

With investment grade corporate bond yields providing meaningful income and with elevated market volatility, we believe there are now opportunities in mispriced bonds with attractive valuations. That said, selectivity matters. Given the size and diversity within corporate bonds, we believe being selective can provide better outcomes for investors. In particular, focusing on attractively valued bonds has historically provided significant outperformance. The market is not homogenous, and there is significant scope for mispricing to exist.

High Yield Benefits from “Fallen Angels”

Fallen angel high yield bonds, downgraded from investment grade to high yield status, offer a unique value in the bond market. They tend to be undervalued prior to downgrade and often recover afterward, leading to historical outperformance compared to the broad high yield market. Their distinctive attributes include systematic investment in oversold bonds, differentiated sector exposure, and higher credit quality. This has resulted in consistent outperformance across various market conditions, including different interest rate and spread environments. Fallen angels, typically issued by larger, established companies, also have a higher upgrade rate to investment grade, presenting a contrarian investment approach with a quality focus. For an overview of recent performance, listen to VanEck’s Product Manager Nico Fonseca discuss fallen angels in the third quarter of 2023.

The Grass Gets Greener for Green Bonds

Green bonds are financing projects all over the world that have a positive environmental impact and provide a pathway to sustainable development. The green bond market’s explosive growth over the past decade has coincided with increased rigor and transparency. As the market matures, standards continue to tighten as recognition grows that increased ambition is needed along with greater green investment to meet global climate goals.

In the current environment, we believe green bonds offer investors a way to build sustainable core fixed income portfolios without significantly affecting risk and return. In addition, the green bond market offers emerging markets an opportunity to fund ambitious sustainability goals, and some countries are already leading the way. Emerging markets will require annual investments to more than triple from $770 billion in 2022 to $2.8 trillion by the early 2030s in order to meet rising energy needs while fulfilling climate goals set by the Paris Agreement.1 We believe that the global emerging markets debt market can play a crucial role in satisfying this financing need. With a strong fundamental investment case for emerging markets debt and the asset class demonstrating relatively strong returns over the last two years versus developed markets fixed income, there is an opportunity for emerging markets to tap into the growing green bond market, in our view. Green bonds have proven themselves to be an attractive solution for both sovereign issuers and fixed income investors. They have the same characteristics as a traditional bond, and thus a similar risk/return profile all else equal, but only finance environmentally friendly projects.

  Name Symbol Exposure
Floating Rate BDC Income ETF BIZD Publicly traded business development companies.
CLO ETF CLOI Investment grade-rated tranches of CLOs of any maturity.
IG Floating Rate ETF FLTR U.S. dollar denominated floating rate notes issued by corporate issuers and rated investment grade.
Corporate Bond Fallen Angel High Yield Bond ETF ANGL Below investment grade corporate bonds denominated in U.S. dollars, issued in the U.S. domestic market and that were rated investment grade at the time of issuance.
Moody’s Analytics BBB Corporate Bond ETF MBBB BBB rated corporate bonds that have attractive valuations and a lower probability of being downgraded to high yield compared to other BBB rated bonds.
Moody’s Analytics IG Corporate Bond ETF MIG Investment grade corporate bonds that have attractive valuations and a lower probability of being downgraded to high yield compared to other investment grade bonds.
Equity Income Energy Income ETF EINC North American companies involved in the midstream energy segment, which includes MLPs, and corporations involved in oil and gas storage and transportation.
Durable High Dividend ETF DURA High dividend yielding U.S. companies with strong financial health and attractive valuations according to Morningstar.
Mortgage REIT Income ETF MORT U.S. mortgage real estate investment trusts.
Preferred Securities ex Financials ETF PFXF U.S. exchange-listed hybrid debt, preferred stock and convertible preferred stock issued by non-financial corporations.
International Bond Emerging Markets Bond Fund EMBAX Actively managed; debt securities issued by governments, quasi-government entities or corporations in emerging market countries, denominated in any currency.
China Bond ETF CBON Fixed-rate, Renminbi-denominated bonds issued in the People's Republic of China by Chinese credit, governmental and quasi-governmental (e.g., policy banks) issuers.
Emerging Markets High Yield Bond ETF HYEM U.S. dollar-denominated bonds issued by non-sovereign emerging markets issuers that are rated below investment grade and that are issued in the major domestic and Eurobond markets.
Green Bond ETF GRNB U.S. dollar-denominated green bonds that are issued to finance environmentally friendly projects, and includes bonds issued by supranational, government, and corporate issuers globally.
International High Yield Bond ETF IHY U.S. dollar, Canadian dollar, pound sterling, and euro denominated below investment grade corporate bonds issued by non-U.S. corporations in the major domestic or Eurobond markets.
J.P. Morgan EM Local Currency Bond ETF EMLC Bonds issued by emerging market governments and denominated in the local currency of the issuer.
Municipal Bond CEF Muni Income ETF XMPT U.S.-listed closed-end funds that invest in U.S. dollar denominated tax-exempt market.
High Yield Muni ETF HYD U.S. dollar denominated high yield long-term tax-exempt bond market.
HIP Sustainable Muni ETF SMI Investment grade municipal debt securities that have been issued to fund operations or projects that support or advance sustainable development, as well as promote positive social and environmental outcomes.
Intermediate Muni ETF ITM U.S. dollar denominated intermediate-term tax-exempt bond market.
Long Muni ETF MLN U.S. dollar denominated long-term tax-exempt bond market.
Muni Allocation ETF MAAX Actively managed; allocates primarily to VanEck municipal exchange-traded products that invest in tax-exempt bonds in pursuit of long-term total return by seeking to reduce duration and/or credit risk during appropriate times.
Short High Yield Muni ETF SHYD U.S. dollar denominated high yield short-term tax-exempt bond market.
Short Muni ETF SMB U.S. dollar denominated short-term tax-exempt bond market.

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IMPORTANT DISCLOSURES

1 International Energy Agency and International Finance Corporation, June 2023.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

The principal risks of investing in VanEck ETFs include sector, market, economic, political, foreign currency, world event, index tracking, and non-diversification risks, as well as fluctuations in net asset value and the risks associated with investing in less developed capital markets. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. ETFs that invest in high-yield securities are subject to subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities; concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. ETFs that invest in companies with small capitalizations are subject to elevated risks, which include, among others, greater volatility, lower trading volume and less liquidity than larger companies. Please see the prospectus of each Fund for more complete information regarding each Fund's specific risks.

You can lose money by investing in the VanEck Emerging Markets Bond Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks which may include, but are not limited to, risks associated with active management, credit, credit-linked notes, currency management strategies, derivatives, emerging market issuers, energy sector, ESG investing strategy, foreign currency, foreign securities, hedging, high portfolio turnover, high yield securities, interest rate, LIBOR replacement, market, non-diversified, operational, restricted securities, investing in other funds, sovereign bond, and special risk considerations of investing in Latin American issuers, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Derivatives may involve certain costs and risks such as liquidity, interest rate, and the risk that a position could not be closed when most advantageous.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.

There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

An investment in a Collateralized Loan Obligation (CLO) may be subject to risks which include, among others, debt securities, LIBOR Replacement, foreign currency, foreign securities, investment focus, newly-issued securities, extended settlement, management, derivatives, cash transactions, market, operational, trading issues, and non-diversified risks. CLOs may also be subject to liquidity, interest rate, floating rate obligations, credit, call, extension, high yield securities, income, valuation, privately-issued securities, covenant lite loans, default of the underlying asset and CLO manager risks, all of which may adversely affect the value of the investment.

The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors' incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.

Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic or social instability.

Business Development Companies (BDC) invest in private companies and thinly traded securities of public companies, including debt instruments of such companies. Generally, little public information exists for private and thinly traded companies and there is a risk that investors may not be able to make fully informed investment decisions. Less mature and smaller private companies involve greater risk than well-established and larger publicly traded companies. Investing in debt involves risk that the issuer may default on its payments or declare bankruptcy and debt may not be rated by a credit rating agency. Many debt investments in which a BDC may invest will not be rated by a credit rating agency and will be below investment grade quality. These investments have predominantly speculative characteristics with respect to an issuer's capacity to make payments of interest and principal. BDCs may not generate income at all times. Additionally, limitations on asset mix and leverage may prohibit the way that BDCs raise capital.

Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. An investment strategy may hold securities of issuers that are not aligned with ESG principles.

Please call 800.826.2333 or visit vaneck.com for a free prospectus and summary prospectus. An investor should consider the investment objective, risks, and charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information about the investment company. Please read the prospectus and summary prospectus carefully before investing.

©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

IMPORTANT DISCLOSURES

1 International Energy Agency and International Finance Corporation, June 2023.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

The principal risks of investing in VanEck ETFs include sector, market, economic, political, foreign currency, world event, index tracking, and non-diversification risks, as well as fluctuations in net asset value and the risks associated with investing in less developed capital markets. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. ETFs that invest in high-yield securities are subject to subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities; concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. ETFs that invest in companies with small capitalizations are subject to elevated risks, which include, among others, greater volatility, lower trading volume and less liquidity than larger companies. Please see the prospectus of each Fund for more complete information regarding each Fund's specific risks.

You can lose money by investing in the VanEck Emerging Markets Bond Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks which may include, but are not limited to, risks associated with active management, credit, credit-linked notes, currency management strategies, derivatives, emerging market issuers, energy sector, ESG investing strategy, foreign currency, foreign securities, hedging, high portfolio turnover, high yield securities, interest rate, LIBOR replacement, market, non-diversified, operational, restricted securities, investing in other funds, sovereign bond, and special risk considerations of investing in Latin American issuers, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Derivatives may involve certain costs and risks such as liquidity, interest rate, and the risk that a position could not be closed when most advantageous.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.

There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

An investment in a Collateralized Loan Obligation (CLO) may be subject to risks which include, among others, debt securities, LIBOR Replacement, foreign currency, foreign securities, investment focus, newly-issued securities, extended settlement, management, derivatives, cash transactions, market, operational, trading issues, and non-diversified risks. CLOs may also be subject to liquidity, interest rate, floating rate obligations, credit, call, extension, high yield securities, income, valuation, privately-issued securities, covenant lite loans, default of the underlying asset and CLO manager risks, all of which may adversely affect the value of the investment.

The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors' incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.

Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic or social instability.

Business Development Companies (BDC) invest in private companies and thinly traded securities of public companies, including debt instruments of such companies. Generally, little public information exists for private and thinly traded companies and there is a risk that investors may not be able to make fully informed investment decisions. Less mature and smaller private companies involve greater risk than well-established and larger publicly traded companies. Investing in debt involves risk that the issuer may default on its payments or declare bankruptcy and debt may not be rated by a credit rating agency. Many debt investments in which a BDC may invest will not be rated by a credit rating agency and will be below investment grade quality. These investments have predominantly speculative characteristics with respect to an issuer's capacity to make payments of interest and principal. BDCs may not generate income at all times. Additionally, limitations on asset mix and leverage may prohibit the way that BDCs raise capital.

Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. An investment strategy may hold securities of issuers that are not aligned with ESG principles.

Please call 800.826.2333 or visit vaneck.com for a free prospectus and summary prospectus. An investor should consider the investment objective, risks, and charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information about the investment company. Please read the prospectus and summary prospectus carefully before investing.

©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.