Structured credit offers higher yields, lower default risk

Advisors and investors are rethinking fixed-income allocations and adding exposure to structured credit. Guggenheim’s Guggenheim Securitized Income ETF (GISC) provides active exposure to asset-backed securities (ABS), collateralized loan obligations (CLOs) and mortgage-backed securities (MBS).

Recent pressure from persistent inflation, a change in Federal Reserve leadership and swings in oil prices has led some market participants to reassess traditional bond holdings and search for alternative yield sources.

Structured credit is the tradeable portion of the asset-backed finance market and includes securities backed by receivables, loans or mortgages. ABS are backed by consumer or commercial loans, CLOs pool leveraged loans and divide credit risk across tranches, and MBS are backed by residential or commercial mortgages. Market data and industry practitioners show that investment-grade tranches of securitized assets have historically experienced lower default rates than many corporate bonds.

One reason some tranches in structured credit offer higher yields is the complexity premium. These securities often require detailed analysis of collateral pools, legal structures and prepayment or reinvestment risk. That additional work can result in wider yields on some tranches compared with similarly rated corporate bonds.

GISC is an actively managed ETF that allocates across the securitized market. The fund’s portfolio team can change sector weights, favor higher-quality tranches or rotate exposure among ABS, CLO and MBS based on valuation and credit assessments.

Karthik Narayanan, head of structured credit at Guggenheim Investments, spoke about the fixed-income risk profile on the Guggenheim Macro Markets podcast in June and argued that bonds offer limited upside and large potential downside. He said: “Now, this matters, because unlike equities, which could go up or down, bonds generally can only go up a little bit and they can go down a lot. So really, as a portfolio manager, what you want to get paid for is grinding out better returns over time and not giving it away very quickly on a few bad positions.”

Critics point to several risks in structured credit, including instrument complexity, potential liquidity constraints for some tranches and the need for specialized research to assess collateral performance and structural protections. Risk drivers vary by segment: prepayment risk affects mortgages, borrower credit affects consumer ABS, and default and recovery dynamics affect CLOs.

Some advisors are adding structured credit exposure as part of broader income strategies. GISC and similar actively managed vehicles provide targeted access to securitized markets and allow portfolio managers to adjust positions in response to valuation and credit trends.