Bank of America says a new global industrial cycle may be just beginning and investors should consider a shift in strategy. The company believes its biggest opportunities in the market lie away from “crowded consensus themes.” “This suggests that a long-needed rebalancing of global industrial production and consumption is just beginning,” Jared Woodard, head of Bank of America’s research and investment committee, said in a note last week. “Recent data suggests the industrial cycle may have just begun, and new policy support, particularly financial deregulation, could extend it.” His trades for industrial growth include small- and mid-cap industries and U.S. banks, as well as yield opportunities that extend beyond the investment-grade world to different sectors of the economy. “At the end of the day, when you have deep, liquid capital markets, it’s usually a way to take growing businesses and industries and structure your investments in a way that focuses on providing ordinary income rather than capital gains,” Woodard said in an interview with CNBC. In fact, he added, the opportunities to earn income in different areas of the market are “greater than ever.” “It’s not just government bonds. It’s not even so-called investment-grade corporate bonds.” For example, the Core Bond Fund primarily tracks the U.S. investment-grade bond market and follows the Bloomberg U.S. Aggregate Bond Index, which includes U.S. Treasuries, corporate bonds, and agency mortgage-backed securities. However, Woodard said the index’s exposure to inflation and interest rate risk may be higher than investors realize. He pointed out that the credit risk is much lower and the exposure to the real economy is also lower. Mortgage Trading In this environment, exchange-traded funds that hold mortgage real estate investment trusts are an attractive way to generate significant income, Woodward noted. Mortgage REITs provide financing by purchasing 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 an expense ratio of 0.42%. MORT 1Y Mountain Van Eck Mortgage REIT Income ETF 1-Year Performance “Our fundamental analyst view is that the rally for home builders, for example, may be a little difficult in the very short term, but at the same time the U.S. housing market is very stable, and overall U.S. consumers and homeowners are in a pretty strong position,” Woodard said. “Add to that our economists’ expectations that the Federal Reserve will cut interest rates later this year, and the environment currently appears to be attractive for mortgage REIT returns,” he added. CLOs and Bank Loans Another segment of the debt market that Woodard sees as attractive in this environment is collateralized loan securities, which are securitized pools of floating rate loans, and bank loans, also known as senior loans. He noted that CLOs provide exposure to the real economy. Additionally, AAA-rated CLO ETFs are higher up in the capital structure, so they hold the assets that receive compensation first, he said. “They do have credit risk, but in our view it’s at a prudent level,” Woodard said. “These are typically short-term loans that can be reset every three months, so their interest rate and inflation exposures are very different from holdings in common bond benchmarks.” He particularly likes the Janus Henderson AAA CLO ETF, which was the first to come to market. The 30-day SEC yield is 4.83% and the expense ratio is 0.20%. JAAAA 1Y Mountain Janus Henderson AAA CLO ETF 1-Year Performance To be sure, there is some concern about exposure to software companies whose shares are being sold due to concerns about disruption from artificial intelligence. Software providers account for about 10% of assets in U.S. CLO transactions, according to Moody’s Ratings. However, if credit deterioration materializes as a result of AI replacement, the impact on CLOs will depend on the type of issuer, the firm said in a note last week. “Once investors decide they’ve sold enough of their software stocks and there’s a bit of a bottom in the industry, that’s when a good CLO manager can use tactics to find undervalued bond opportunities.” Contrarian investors could also look to buy bank loans on the spur of the moment through the State Street Blackstone Senior Loan ETF, he said. The fund has a 30-day yield of 6.64% and a total expense ratio of 0.70%. “This is the best company in the industry,” Woodard said. SRLN 1Y Mountain State Street Blackstone Senior Loan ETF 1-Year Performance Choosing between a bank loan ETF or a CLO ETF ultimately comes down to priorities, he said. “These senior loan ETFs are very attractive to investors who are happy with daily returns, a bit like the stock market, but with higher yields than you typically get with traditional bonds,” Woodard said. “CLO ETFs have performed well for people who want a slightly lower yield but want their return flow to be a little smoother.”
