Ask the Manager: Eric Lutton on Enhancing Yield with Non-Traditional Income Assets

Welcome to Ask the Manager, ETF Central's series where we sit down with top experts, analysts and portfolio managers to dive into the latest investment trends, market updates, and economic insights.

This week, we sat down with Eric Lutton, Chief Investment Officer at Sound Income Strategies and Portfolio Manager for the Sound Enhanced Fixed Income ETF

, and discussed the recent bond market volatility, the evolving role of income strategies, and how FXED is positioned to adapt.

What have been your big takeaways from the bond markets over the past several days as all of this volatility has been unfolding?

One of the primary takeaways was confirmation that cash is king in times of distress, and even “parking” capital in U.S. government debt can give your portfolio whiplash. It's not just spread-based securities that can get knocked around.

The 10-year closed overseas, pre-open (04/07/25) at $106 / 3.90% and closed overseas, pre-U.S. open on Wednesday at $101 / 4.49%. We have not seen that much volatility in the 10-year for a very long time. 

So, I believe that cash or money market securities do play a short-term role during volatile times, but income investing certainly requires a longer-term viewpoint than a couple of weeks at a time, which is why we focus on portfolio diversification and resiliency.

For income-focused investors, beyond the obvious fixed income exposures and dividend equity approaches, what other income-generating assets may be worth taking a closer look at?

Traditional fixed income or high-dividend approaches have their place, but adding non-traditional or unconstrained income-based securities to a traditional fixed income strategy has the potential to generate superior outcomes.

If a manager can add uncorrelated or low-correlated non-traditional assets to a core fixed income portfolio, they can potentially lower risk, reduce max drawdown, and increase income/yield.

The approach is similar to what Harry Markowitz proposed back in the 1950s with the efficient frontier—showing that a mix of bonds and equities can lower risk and increase returns. Though the original optimal 60/40 blend has evolved over the decades, the portfolio benefits still hold true.

When I say non-traditional income, I’m referring to assets that sit outside of the Bloomberg U.S. Aggregate Index, which serves as the benchmark for most fixed income or bond strategies.

Therefore, adding high-yield, sovereign debt, private credit, preferred securities, or cash flow-based assets like Business Development Companies and Real Estate Investment Trusts can enhance a traditional fixed income strategy.

How does your approach respond to interest rates moving differently than most fixed income ETFs?

We set out to build something differentiated with our FXED ETF. When it comes to rate moves, fixed-coupon securities typically fall in price when interest rates rise—whether due to Fed action or a natural shift or steepening in the yield curve. Many fixed-income ETFs move in tandem with those rate changes unless they are hedged or include low- or non-correlated assets.

One example is how we incorporate Business Development Companies (BDCs) into our ETF. As rates rise, the floating-rate loans held by BDCs generate higher interest payments, which can lead to increased dividends from the BDCs.

This can be particularly useful when traditional fixed-coupon securities decline in value due to rising rates—quality BDCs may actually increase their dividends, offering a potential hedge within a traditional fixed-income ETF.

Do non-traditional fixed income securities pose a greater risk than investment-grade bonds?

Most non-traditional assets will have greater credit risk, spread risk and liquidity risk then investment-grade bonds, but if negative or low correlated non-traditional securities are added to a traditional portfolio, the synergistic effect can lower the risk, so don’t think of risk in a vacuum.

This is where experience is key since a manager needs to understand the nuances of these non-traditional securities to balance risk/return and drive to the desired outcome.

What other non-traditional fixed income assets is FXED looking to add in the future?

We already utilize high-yield bonds, sovereign debt, BDCs, and REITs, and might consider private credit or some interval funds in the future, after considerable due diligence on how these assets would affect our ETF.

As an actively managed ETF, FXED is designed to identify and allocate to those investment grade and below investment grade income producing securities that we believe will help drive compelling yields and deliver possible opportunities for capital appreciation.  In markets that require nimble approaches, FXED is well positioned to capitalize on this differentiated approach.