EXCLUSIVE: Why Eric Lutton Says Sitting In Cash Could Cost You Big

Investors might be flocking to fixed-income ETFs at a record pace, but a growing part of the market is starting to ask if it’s sufficient to just sit on money in Treasuries and T-bills. TMX VettaFi has found that to date this year, over $140 billion have been invested in fixed-income ETFs, indicating a broad desire for safety in the face of ongoing macroeconomic uncertainty and volatility in interest rates.

Yet, according to Larry Fink, CEO of BlackRock, over $11 trillion remains tied up in money market funds. The question is moving from “Why fixed income?” to “Which fixed-income approach now makes sense?”

For others, the solution is diversification and flexibility. “I don't fault them given the volatility we've seen this year, because a high allocation to money markets and T-bills has not been a bad strategy.  However, investors should keep in mind that the majority of the S&P500's returns are mostly generated in less than 50 key days, so if you miss out on a lot of those days, you'll probably underperform,” said Eric Lutton, Co-Chief Investment Officer of Sound Income Strategies, in an interview with Benzinga.

With more than $37 trillion in federal debt and inflation eating away at purchasing power, Lutton encourages investors to reconsider the concept of “safety” in Treasuries. Rather, he suggests that longer-term investors consider those assets with greater income potential—like credit vehicles—even if slightly more volatility is required, as doing nothing may still result in a true loss.

Lutton oversees the Sound Enhanced Fixed Income ETF FXED, one of an increasing number of actively managed fixed-income ETFs that blend core bond holdings with alternative income-generating vehicles like BDCs (Business Development Companies) and REITs. These vehicles, Lutton says, deliver more than mere yield; they introduce a degree of diversification lacking in traditional core bond portfolios.

"We've added BDCs,equity REITs and a few emerging market securities to a mostly investment grade bond portfolio for two main reasons," Lutton explains. "First, we can get yields from 6% up to 12% utilizing REITs and BDCs and 6%+ with emerging market bonds/ETFs and add them to investment grade bonds that only produce 4.5% to 5.5%. So, we enhance the yield by a material margin. Secondly, BDCs and equity REITs have correlations with investment grade bonds that are under .55 and the correlation between emerging market bonds with BDCs and REITs is around 0.65. Therefore, we are increasing yields and lowering the overall risk of the fund."

This is part of a larger trend: the growth of active fixed-income ETFs, which seek alpha by making judicious credit selections, managing duration, and including wider assets. Active strategies, albeit still dwarfed by passive, are now starting to catch on—most notably among income-hungry investors who don’t want to blindly track indexes full of low-yielding government debt.

Also Read: Seeking Income And Stability? NEOS’s Gold High Income ETF May Be Your Answer

For FXED, Lutton emphasizes “crossover bonds”, ones that are investment-grade rated by one agency but high-yield rated by another. The aim is to have a portfolio that returns a decent yield, now in the 6.75% range, without going too far down the credit quality chain.

Importantly, FXED distributes dividends twice per month, a feature designed to appeal to income-focused investors. That consistency also means the fund must stay fully invested, regardless of market conditions. "As much as I'd love to ‘market time,’ which would increase returns and probably lower our standard deviation, due to fund mandates, I'm really not allowed to do too much timing," Lutton said.

However, he thinks there’s merit in being choosy. One top pick is a bond from Commercial Metals Co. CMC, a vertically integrated steel producer with strengthening credit fundamentals. “While CMC's sector overall might not look so great, CMC is a vertically integrated electric arc furnace (less expensive vs traditional blast furnace) steel producer with a healthy balance sheet and lower pension liabilities.  This credit is currently rated double BB or high yield, and we expect over time that this name will possibly receive a credit upgrade to BBB- or investment grade -thereby improving the +150 spread over U.S. Treasuries over time,” he said.

As investors consider their choices in a still-soft macro backdrop, Lutton’s viewpoint is simple: not every fixed-income ETF is equal. While some are used as cash substitutes or duration hedges, others, namely those with active mandates, are set up to return more throughout complete market cycles.

As more investors look for that answer, the subtle transformation of fixed-income ETFs from passive placeholders to active income machines could become the sector’s greatest narrative in 2025 and beyond.

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Image created using artificial intelligence via Midjourney.