Where the manager of this top Morningstar-rated fund is finding income right now

Capital Group Core Plus Income ETF (CGCP) manager Chitrang Purani is actively positioning the $6 billion fund, which boasts a 5.23% 30-day SEC yield, to balance attractive income with risk mitigation amid tight credit spreads and potential economic downside risks, particularly in the labor market. The strategy involves leaning into quality by shifting from high-yield to investment-grade and securitized credit, including MBS and ABS, to capitalize on complexity premiums and fortify the portfolio. Purani also favors shorter-duration Treasurys, anticipating potential for more aggressive Fed rate cuts than the market's current 3% terminal rate expectation if economic conditions deteriorate, presenting an attractive risk-reward symmetry.

Analysis

The Capital Group Core Plus Income ETF (CGCP), managed by Chitrang Purani, is actively positioning its $6 billion portfolio to balance attractive income with risk mitigation. The ETF currently offers a 5.23% 30-day SEC yield and holds a 4-star/Bronze Morningstar rating, reflecting its objective to provide consistent excess returns within a core bond strategy. This approach is particularly relevant given tight credit spreads and potential economic downside risks.

Purani's team is "leaning up in quality" by shifting away from high-yield bonds towards investment-grade and securitized credit, including asset-backed and mortgage-backed securities. This strategic move aims to fortify portfolios against economic volatility while capitalizing on a "complexity premium" in securitized products, which remains attractive compared to tight investment-grade spreads. The fund's heaviest weighting is 34.2% in AA-rated bonds, with nearly 45% in MBS and 7% in ABS.

Despite solid economic growth, Purani highlights significant downside risks, particularly from a potential weakening labor market that he believes is not fully priced into the market. The ETF also holds nearly 14% in Treasurys, favoring maturities of five years or shorter. Purani anticipates a potential for more aggressive Federal Reserve rate cuts than the market's current 3% terminal rate expectation, especially if economic growth falls below the Fed's projections, presenting an attractive risk-reward symmetry.

Key Decisions for Investors

• Investors seeking attractive income with a focus on risk mitigation may consider CGCP, given its active management, 5.23% SEC yield, and strategic shift towards higher-quality and securitized credit.
• Closely monitor labor market data and Federal Reserve communications, as potential labor market weakness and more aggressive rate cuts are key factors influencing the fund's strategy and broader market outlook.
• Evaluate the potential for a 'complexity premium' in securitized credit, understanding that while it offers attractive returns relative to tight investment-grade spreads, it necessitates thorough research into underlying collateral risks.