High yielding plays for a new industrial cycle, according to Bank of America

A new global industrial cycle may have just kicked off — and investors should consider switching up their playbooks, according to Bank of America. The firm believes the best opportunities in the market are away from “crowded consensus themes.” “We suggest that the long-needed rebalancing of global industrial production and consumption is just beginning,” Jared Woodard, head of Bank of America’s research investment committee, said in a note last week. “Recent data suggest that an industrial cycle may have just started, and new policy supports – especially financial deregulation – could extend it.” His trades for industrial growth include small- and mid-cap industrials and U.S. banks, as well as yield opportunities that expand beyond the investment-grade universe and into different areas of the economy. “Ultimately, when you have deep and liquid capital markets, they’re usually ways to take a growing business or industry and structure investments in a way that are focused on providing current income rather than capital gains,” Woodard said in an interview with CNBC. In fact, the opportunity to find income in diverse corners of the market “has never been greater,” he added. “It’s not just government bonds. It’s not even so-called investment grade corporate bonds.” For instance, core bond funds largely follow the Bloomberg U.S. Aggregate Bond Index, which tracks the U.S. investment-grade bond market and includes Treasurys, corporate bonds and agency mortgage-backed securities. However, the index’s exposure to inflation and interest-rate risk is sometimes higher than investors realize, Woodard said. It has much less credit risk and a lower exposure to the real economy, he noted. Mortgage play In this environment, exchange-traded funds that hold mortgage real estate investment trusts are an attractive way to earn strong income, Woodward noted. Mortgage REITs provide financing by buying or originating mortgages and mortgage-backed securities. One ETF that stands out is the VanEck Mortgage REIT Income ETF , he said. The fund has a 30-day SEC yield of 12.5% and a 0.42% expense ratio. MORT 1Y mountain VanEck Mortgage REIT Income ETF one-year performance “The view from our fundamental analysts is that while upside for home builders, for example, might be a bit of a challenge in the very near term, that at the same time, the U.S. housing market is quite stable and in the aggregate, U.S. consumers and homeowners are in a pretty strong position,” Woodard said. “That, plus the expectation from our economist that the Federal Reserve will cut interest rates later on this year, it looks like an environment in which the income from mortgage REITs is an attractive place to look today,” he added. CLOs and bank loans Another segment of the fixed-income market Woodard finds attractive in this environment are collateralized loan obligations, which are securitized pools of floating-rate loans, and bank loans , also known as senior loans. CLOs provide that exposure to the real economy, he noted. Plus, the AAA-rated CLO ETFs hold assets that are the first to get paid since they are senior in the capital structure, he said. “While they do have credit risk, it’s, in our view, a prudent level,” Woodard noted. “Because these are typically shorter-term loans that can reset every three months, they have much different interest-rate exposure and inflation exposure than the holdings in a typical bond benchmark.” He specifically likes the Janus Henderson AAA CLO ETF , which was the first to market. It has a 4.83% 30-day SEC yield and a 0.20% expense ratio. JAAA 1Y mountain Janus Henderson AAA CLO ETF one-year performance To be sure, there has been some concern about exposure to software companies, which have seen their stocks sell off on fears of disruption by artificial intelligence. Software providers account for about 10% of the assets in U.S. CLO transactions, according to Moody’s Ratings. However, if credit weakness materializes as a result of AI displacement, the impact on CLOs would depend on the type of issuers represented, the firm said in a note last week. “If and when investors decide that they have sold enough software stocks, and there’s a little bit of a floor for the industry, that’s precisely the moment where a competent CLO manager could be tactical about finding undervalued fixed income opportunities.” Contrarian investors may also look to buy the dip in bank loans through the State Street Blackstone Senior Loan ETF , he said. The fund has a 30-day yield of 6.64% and a 0.70% gross expense ratio. “This is a best of breed company in the industry,” Woodard said. SRLN 1Y mountain State Street Blackstone Senior Loan ETF one year performance Choosing between a bank loan ETF or CLO ETF comes down to preference, he noted. “For investors who are comfortable with day-to-day returns that look a little bit more like an equity market, but with yield that is higher than what you can typically get in conventional fixed income, those senior loan ETFs have been really attractive,” said Woodard. “For folks who want maybe a bit less yield but a little bit smoother return stream, the CLO ETF has performed well.”