Generating income in retirement is a goal for many investors. Steady, reliable cash flow can help retirees maintain their lifestyle and manage living expenses, medical costs, and unexpected financial needs.
The challenge, however, lies in the fact that traditional fixed-income investments, such as government bonds, may have difficulty generating enough income to fully meet the needs of retirees, especially in the face of relatively high inflation.
What’s one possible solution?
The answer may lie in a multi-sector income strategy.
Diversification Across Multiple Sectors
A multi-sector income strategy combines different, higher income yielding fixed-income sectors into a single portfolio: for example, high-yield and investment-grade bonds, emerging market bonds and securitized debt. By investing in these higher income yielding sectors, retirees can help meet their retirement income needs.
Plus, this diversified approach typically results in lower volatility and lower correlation with the other fixed income investments previously mentioned leading to better risk-adjusted returns. The variety in sectors also helps mitigate the impact of underperformance in any one area because other parts of the portfolio might be performing well to offset some or all of it.
Flexibility
One of the key benefits of actively managed multi-sector income funds is their ability to adjust sector weightings based on market conditions, data and research. This flexibility allows the fund to respond to changing economic environments and interest rates. Unlike some fixed-income strategies with more rigid allocations and narrower investment universes, these ETFs can capitalize on new opportunities in each of the sectors and respond quickly to protect against market downturns.
A Tool For Retirees
Multi-sector income ETFs are designed to generate consistent income from various sectors, which means they can be an attractive choice for retirees who rely on regular cash flows. The mix of high-yield and investment-grade bonds allows the ETF to adjust income generation based on market conditions. In periods of economic growth, higher-yielding sectors like high-yield corporates and emerging market bonds may boost income, while more stable investment-grade bonds can provide a safer income source during uncertain times.
Investment options like the Capital Group Multi-Sector Income Select ETFTM (Canada) (CAPM) are designed to meet these needs. CAPM combines four global credit sectors – investment-grade corporates, high-yield corporates, emerging markets bonds, and securitized debt – into a single portfolio.