High-yield bond ETF rallies after Fed rate cut as 'free ride' in cash ends

By Christine Idzelis

'People are looking to deploy cash,' says Goldman Sachs Asset Management's Brendan McCarthy

Hello! This week's ETF Wrap looks at the rally in markets following the Fed's big cut to interest rates - as well as potential sources of income in bonds and stocks as investors consider strategies beyond cash.

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U.S. stocks and high-yield bonds rallied Thursday following the Federal Reserve's big cut to interest rates, as investors mull strategies beyond cash in anticipation that rates will continue to fall.

The S&P 500 SPX clinched a fresh record high, with the SPDR S&P 500 ETF Trust SPY jumping 1.7% for a year-to-date gain of about 20%, according to FactSet data. High-yield corporate bonds - sometimes referred to as "junk" for their riskier ratings below investment grade - also climbed, with the iShares iBoxx $ High Yield Corporate Bond ETF HYG closing 0.3% higher Thursday for a total return so far this year of 7.9%.

The Fed on Wednesday lowered its benchmark rate by half of a percentage point, kicking off a rate-cutting cycle that should benefit riskier companies with heavier debt burdens as well as rate-sensitive areas of the stock market. The move also means investors sitting in cash face lower rates from their savings, spurring some to hunt for yield elsewhere in markets.

"Free-riding cash is going to be going away," said Brendan McCarthy, global head of ETF distribution at Goldman Sachs Asset Management, in a phone interview. "Now that the Fed is easing, people are looking to deploy cash," as the 5% "free ride" is ending, he said.

Investors seeking "attractive" fixed income with "minimum volatility" can capture a "little bit of extra yield" by extending duration slightly in a mix of assets beyond Treasury bills, said McCarthy. He pointed to the Goldman Sachs Access Ultra Short Bond ETF GSST as an example of this strategy, saying the actively managed fund provides exposure to T-bills, corporate credit, the safest portion of collateralized loan obligations and agency mortgage-backed securities.

So far in 2024, the ETF, which focuses on assets with maturities of less than a year, has posted a total 4.8% return through Thursday, according to FactSet data. That compares with a 3.8% total return from the SPDR Bloomberg 1-3 Month T-Bill ETF BIL, a popular fund for cash-like securities that holds ultra-short-term Treasury bills, over the same period.

The Fed's interest-rate cut on Wednesday "will resonate through the financial system for the coming months," setting in motion what looks like a persistent lowering of rates over the next two years, said Rick Rieder, BlackRock's chief investment officer of global fixed income, in emailed commentary after the central bank announced its policy decision.

"As interest rates move lower, fixed-income assets will benefit from the move, but not necessarily in a straight line," he wrote. The "singular rate cut doesn't provide the answer to questions surrounding the economy, the upcoming election, or how geopolitics will play out."

Rieder told MarketWatch earlier this week, ahead of the Fed's rate decision, that he favors the "belly" of the yield curve, particularly the three-to five-year portion, and currently likes high-yield bonds.

He leads the BlackRock Flexible Income ETF BINC, which holds a mix of high-yield and investment-grade securities across fixed-income sectors globally. The ETF, which launched last year, has gained 5.9% so far in 2024 on a total-return basis, FactSet data show.

That exceeds this year's gains from the iShares Core U.S. Aggregate Bond ETF AGG, which passively tracks the U.S. investment-grade bond market, and the iShares Core Total USD Bond Market ETF IUSB, which tracks an index of U.S.-dollar-denominated bonds including high-yield and investment-grade securities.

The iShares Core U.S. Aggregate Bond ETF is up 4.9% this year on a total-return basis through Thursday, while the iShares Core Total USD Bond Market ETF has posted a total return of 5.3% over the same period, FactSet data show.

"The easy days of parking money in T-bills" and getting 5% from those cash-like securities will soon be in the "rearview mirror," said Sean O'Hara, president of Pacer ETFs, in a phone interview.

Income from stocks

Investors also are seeking income from the stock market.

One option is the Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF QDPL, designed to provide more income than the dividend yield of the S&P 500 index, said O'Hara.

The ETF aims to provide "cash distributions equal to 400% of the S&P 500 ordinary yield in exchange for modestly lower exposure" to the performance of the index, according to its factsheet at the end of June.

"We pay it out quarterly," O'Hara said.

The fund invests around 85% in the S&P 500 and then uses about 15% of the assets as "collateral and dividend futures contracts," according to O'Hara. The ETF's exposure to the S&P 500 gives investors potential for more growth than dividend-focused strategies tied to stocks in areas like utilities and financials.

Shares of Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF have gained 15.8% so far this year, bringing its total return to around 19.1% through Thursday, FactSet data show.

Other opportunities to diversify sources of income within the stock market include Goldman Sachs's S&P 500 Core Premium Income ETF GPIX and Nasdaq-100 Core Premium Income ETF GPIQ, both of which use covered-call strategies for monthly distributions while giving up some of the upside from the respective indexes, according to Goldman's McCarthy.

The S&P 500 Core Premium Income ETF has returned a total 17.7% in 2024 through Thursday, while the Nasdaq-100 Core Premium Income ETF is up a total 16.4% over the same stretch, FactSet data show.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top performers                                                                                                                                                                         %Performance 
   SPDR S&P Regional Banking ETF                                                                                                                                                          5.3 
   SPDR S&P Homebuilders ETF                                                                                                                                                              5.1 
   Invesco S&P SmallCap 600 Revenue ETF                                                                                                                                                   5.1 
   Invesco S&P SmallCap Value with Momentum ETF                                                                                                                                           5.1 
   Pacer US Small Cap Cash Cows 100 ETF                                                                                                                                                   4.9 
   Source: FactSet data through Wednesday, Sept. 18. Start date Sept. 12. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

...and the bad

   Bottom performers                     %Performance 
   Sprott Uranium Miners ETF             -4.8 
   United States Natural Gas Fund LP     -2.6 
   Global X Uranium ETF                  -2.4 
   Global X Lithium & Battery Tech ETF   -2.3 
   Grayscale Ethereum Mini Trust         -2.2 
   Source: FactSet 

New ETFs

Janus Henderson Group announced Sept. 18 that it launched the Janus Henderson Mid Cap Growth Alpha ETF JMID, which will invest at least 80% of its net assets in shares of midcap companies "selected for their growth potential."Deepwater Asset Management said Sept.18 that it launched the Intelligent Livermore ETF LIVR, "named for famed trader Jesse Livermore," which will invest in stocks using an artificial-intelligence-powered investment strategy "built entirely on large-language models." The firm said that at launch the ETF "will focus on opportunities in AI, Latin American equities, Asian equities, renewables and energy, and defensive stocks as selected by the AI investment committee."Pacer ETFs said Sept. 17 that it launched the Pacer Nasdaq International Patent Leaders ETF PATN to track "the top 100 companies within the Nasdaq Global Ex-United States Large Mid Cap Index based on patent valuation." That same day, the firm announced another new ETF, the Pacer MSCI World Industry Advantage ETF GLBL, whose rules-based strategy aims to "capture the growth potential of global developed markets" through exposure to "the leading companies in countries that have an industry advantage."

Weekly ETF reads

What's Left to Be ETF'd? (Wall Street Journal)Virtus and BondBloxx join SSGA in private credit ETF queue (Financial Times)An Endowment ETF Plans to Ride Wall Street's Private-Asset Craze (Bloomberg)Brian Armstrong, ETF Experts Shoot Down 'Paper Bitcoin' Rumors (CoinDesk)Saudi Arabia approves first ETFs tracking Hong Kong-listed equities (Reuters)

-Christine Idzelis

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09-19-24 1831ET

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