It’s no secret that inflation has the potential to eat away at the purchasing power of your money. Treasury Secretary Janet Yellen said at the G-7 financial ministers meeting in June that inflation will be higher at “around 3%”. The Bureau of Labor and Statistics reported a 5% year-over-year increase in prices from May 2020, the highest increase in over ten years.¹ Whether price increases will continue or not, investors who are preparing for retirement or living in retirement need to be very mindful of inflation.
What many people don’t realize is the rate of inflation on certain needs during retirement, such as healthcare, can easily reach 6-10%. That means if you retire today and live 30 years or more into retirement, you’ll need 3-4 times the amount of income at the end of your retirement as you did on your first day of retirement.
Advisors can help their retirement-focused clients meet two key investment objectives:
• Hedge against future inflation risks, recognizing that potential inflationary pressures are mounting.
• Generate an adequate level of portfolio income.
Unfortunately, inflation is not their clients only concern. The low-yield environment is a challenge that advisors must now also address and overcome when investing for their clients’ long-term, retirement success.
The dramatic fall in interest and bond yields over the past 40 years represents a real threat for individual investors, particularly those currently in retirement or approaching retirement. Since the peak of the 10-Year Treasury in 1981 at 15.84%, the risk-free government bond rate has fallen by more than 90% to its lowest levels in history.²
If bonds are designed to hedge risk in your client’s portfolio, then consider including in a diversified fixed income portfolio, investment grade bonds. An allocation to these bonds helps balance the risk in an overall portfolio. Think of them as portfolio insurance in case stocks go south.
If bonds serve as a source of income, you may want to look into higher-paying bonds. We are in the first stage of an economic recovery and now is a good time to consider high-yield bonds. They are riskier, but they are less sensitive to interest rates and inflation. And an improving economy means defaults are less likely.
High-yield bonds also typically have low durations.³ The lower the duration, the less sensitive a bond will be to interest-rate changes. Another important factor in low duration is, with bonds maturing more quickly, that money can be reinvested into newer bonds with higher coupons (interest rates based on the face values or par values of the bonds.)
Of course, economic recovery is not guaranteed. There’s still a lot of uncertainty, so be wary of how much risk you and your clients take.
Most advisors don’t have the time or resources to select individual bonds. When purchasing bonds, you need to consider its duration, interest payment, and the creditworthiness of the issuer. Research must be carefully done.
That is why many advisors and investors invest in ETFs. Sound Income Strategies offers the Sound Enhanced Fixed Income ETF (SDEF) specifically for those planning for retirement or in retirement. SDEF is actively managed by a team of fixed income experts that has been providing income-generating solutions to clients for 20 years. The ETF’s primary objective is to deliver current income, while providing the opportunity for capital appreciation by investing in fixed income securities.
The ETF invests in a combination of investment grade and high yield bonds. Typically, the ETF will have an approximate equal weighting of investment grade and high yield debt securities; however, the portfolio weighting will be adjusted from time to time. The team uses a fundamental, “bottom-up” approach to analyzing individual debt securities.
A properly managed, income-oriented portfolio could deliver both income potential and risk mitigation to help solve most challenges investors face when investing for a more successful, sustainable retirement. Investment grade and high yield bonds can be important components in your clients’ portfolios during economic recoveries and inflationary environments to help them make the most of their hard-earned savings.
Before investing you should carefully consider the Fund's investment objectives, risks, charges and expenses. This and other information is in the prospectus. A prospectus may be obtained by calling (833) 916-9056 or visiting www.soundetfs.com. Please read the prospectus carefully before you invest.
Investing involves risk, including the potential loss of principal. There is no guarantee that the Funds investment strategy will be successful. Shares may trade at a premium or discount to their NAV in the secondary market. The Fund is new and has a limited operating history. The Fund has a limited number of financial institutions that are authorized to purchase and redeem shares directly from the Fund; and there may be a limited number of market makers or other liquidity providers in the marketplace.
Securities rated below investment grade are often referred to as high yield securities or “junk bonds.” Investments in lower rated corporate debt securities typically entail greater price volatility and principal and income risk. High yield securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities.
The Fund's investments in bonds and other debt securities will change in value based on changes in interest rates. If rates rise, the value of these investments generally declines. Securities with greater interest rate sensitivity and longer maturities generally are subject to greater fluctuations in value. The Fund is considered to be non-diversified, which means that it may invest more of its assets in the securities of a single issuer or a smaller number of issuers than if it were a diversified fund.
The Fund is distributed by Foreside Fund Services, LLC.
¹ Source: USA Today. “White House, Federal Reserve push back on inflation concerns as prices shift,” June 24, 2021.
² Source: Sound Income Strategies. “Give Your Clients Sound Financial Guidance,” 2021.
³ Source: The iShares iBoxx $ High Yield Corporate Bond ETF serves as the index, effective duration of 3.68 years, June 23, 2021.