As cash solutions and fixed income strategies are becoming increasingly crucial, Touchstone Investments has emerged as a key player in the exchange-traded fund (ETF) landscape, particularly within the securitized income market. The firm’s recent focus on two ETFs—the Touchstone Securitized Income ETF (ticker: TSEC) and the Touchstone Ultra Short Income ETF (ticker: TUSI)—underscores its commitment to offering sophisticated tools for advisors and broker-dealers.
Matt Barry, Vice President of Product Management and Head of Capital Markets at Touchstone, recently joined Wealth Advisor Managing Editor Scott Martin to share his insights into how these products are designed to meet the needs of today’s advisors and their clients.
Touchstone Investments, traditionally recognized for its mutual funds, has strategically expanded into the ETF market, bringing forth offerings that cater to both short-term cash management and longer-duration fixed income strategies. The firm developed TSEC and TUSI, two flagship ETFs, with a focus on securitized fixed income, aiming to provide competitive yields and a step-up in credit quality for advisors.
Both TSEC and TUSI emphasize securitized assets, which include agency residential mortgage-backed securities, commercial mortgage-backed securities, collateralized loan obligations, and other asset-backed securities.
These assets are pools of cash flows that are tranched based on risk levels. Historically, securitized fixed income has provided incremental yield for comparable credit quality, making it an appealing option for investors seeking diversification and competitive returns.
Fort Washington Investment Advisors manages these ETFs, fielding a team with extensive experience in securitized income. With more than 30 years in the market, the lead portfolio manager has overseen these strategies for institutional clients, offering them now through ETFs to a broader audience.
TSEC and TUSI differ primarily in their duration and risk profiles, providing advisors with options depending on their clients’ needs. TUSI, the Touchstone Ultra Short Income ETF, is designed with a duration of typically less than one year, making it an attractive alternative for managing cash allocations. The fund maintains a high credit quality profile, with more than 85% of its holdings in investment-grade securities, which adds a layer of security for those looking to mitigate interest rate risk while still capturing yield.
On the other hand, TSEC, the Touchstone Securitized Income ETF, targets a two- to three-year duration, positioning it in the short-term bond category. This fund is slightly more aggressive than TUSI, incorporating a blend of investment-grade and below-investment-grade securities. The result is a higher potential yield with an associated increase in volatility, appealing to investors willing to accept more risk for greater return opportunities.
For financial advisors, these ETFs present timely solutions, particularly in the context of recent monetary policy actions. As the Federal Reserve navigates the current economic environment, with potential shifts in interest rates on the horizon, advisors are increasingly focusing on optimizing cash allocations. TUSI can be viewed as a tactical tool to enhance yields on cash positions, offering a step up from traditional money market funds or other cash-like instruments.
With the Fed’s rate cuts potentially reducing the attractiveness of simple cash holdings, the ability to transition into an ultra-short-duration ETF such as TUSI becomes critical. The fund allows advisors to lock in yields while managing reinvestment risks that could arise as rates decline. This strategy is designed not only to preserve capital but also to position portfolios to capture additional yield through securitized assets, which are typically priced at a discount and offer potential price appreciation.
While TUSI serves a specific role in cash management, TSEC offers a broader alternative application within fixed income portfolios. Advisors are increasingly integrating TSEC as a complement to traditional high-yield corporate bonds. The securitized nature of TSEC’s assets provides a competitive yield with a potentially better credit quality profile compared to that of high-yield corporates. This construction makes TSEC an appealing alternative or addition within the yield-seeking portion of an advisor’s fixed income allocation.
Touchstone’s emphasis on securitized fixed income in TSEC allows for a varied approach to bond investing. This diversification can be particularly valuable in periods of economic uncertainty when traditional corporate bonds might face heightened credit risks. Securitized assets, backed by pools of loans and mortgages, often offer different risk-return characteristics compared to those of corporate bonds, thereby enhancing portfolio resilience.
One of the critical aspects that Touchstone brings to the ETF table is active management, particularly in the realm of securitized income. The Fort Washington team’s expertise plays a pivotal role in navigating the complexities of these markets.
Securitized fixed income is a sector where issuer selection, cash flow modeling, and ongoing surveillance are crucial. Not all securitized assets are created equal; some may pose significant risks, while others offer substantial rewards.
The active management approach Fort Washington employs allows for thorough due diligence and continuous monitoring of the health of the underlying assets. This capability is particularly important in a market environment where defaults and downgrades can quickly impact the value of securitized assets. By actively managing these risks, Fort Washington aims to provide better risk-adjusted returns.
Advisors considering these ETFs should evaluate where TSEC and TUSI fit within their clients’ overall investment strategies. For clients with significant cash holdings, TUSI offers an opportunity to enhance returns without dramatically increasing risk. The fund represents a strategic move to capture current yield levels before potential rate cuts reduce the attractiveness of cash-equivalent instruments.
For clients with a higher risk tolerance, particularly those seeking to diversify their fixed income portfolios, TSEC provides exposure to securitized assets with the potential for higher yields and credit quality improvements. This ETF can serve as a partial replacement for high-yield corporate bonds, offering a different risk-return profile that may be better suited to the current market landscape.
Touchstone’s foray into the ETF market with TSEC and TUSI highlights the growing importance of securitized income in contemporary investing. These ETFs provide advisors with tools to navigate a challenging fixed income environment, offering solutions that cater to both conservative cash management needs and more aggressive yield-seeking strategies.
As the market continues to evolve, the role of securitized income and active management will likely become more pronounced. Advisors who understand and implement these strategies will be better positioned to meet their clients’ needs in both the short and long terms. The combination of Fort Washington’s expertise with Touchstone’s commitment to delivering institutional-grade products to a broader audience sets the stage for these ETFs to continue to play a significant role in forward-looking portfolio construction.
_____________________
Additional Resources
- Contact Touchstone Investments ETFs
- Touchstone Securitized Income ETF (TSEC) Overview
- Touchstone Ultra Short Income ETF (TUSI) Overview
______________________
Disclosures
Investing involves risk, principal loss is possible.
TSEC and TUSI Fund Risk:
The Fund invests in fixed-income securities which can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. The Fund invests in mortgage-backed securities and asset-backed securities which are subject to the risks of prepayment, defaults, changing interest rates and at times, the financial condition of the issuer. The Fund invests in investment grade debt securities which may be downgraded by a Nationally Recognized Statistical Rating Organization (NRSRO) to below investment grade status. The Fund invests in non-investment grade debt securities which are considered speculative with respect to the issuers’ ability to make timely payments of interest and principal, may lack liquidity and has had more frequent and larger price changes than other debt securities. The Fund invests in U.S. government securities which are neither issued nor guaranteed by the U.S. Treasury and are not guaranteed against price movements due to changing interest rates.
The Adviser engages a sub-adviser to make investment decisions for the Fund’s portfolio; it may be unable to identify and retain a subadviser who achieves superior investment returns relative to other similar sub-advisers. Events in the U.S. and global financial markets, including actions taken to stimulate or stabilize economic growth may at times result in unusually high market volatility, which could negatively impact Fund performance and cause it to experience illiquidity, shareholder redemptions, or other potentially adverse effects. Financial institutions could suffer losses if interest rates rise or economic conditions deteriorate. The Fund’s service providers are susceptible to cyber security risks that could result in losses to a Fund and its shareholders. Cyber security incidents could affect issuers in which a Fund invests, thereby causing the Fund’s investments to lose value. The Fund invests in Collateralized Loan Obligations (CLOs) that have risks that largely depend on the type of underlying collateral and risks may include illiquidity, limited active market, the possibility that distributions from collateral securities will be insufficient to make interest or other payments, the potential for a decline in the quality of the collateral, and can bear the risk of default by the loans. The Fund invests in foreign securities which carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. The Fund invests in municipal securities which may be affected by uncertainties in the municipal market related to legislation or litigation involving the taxation of municipal securities or the rights of municipal security holders in the event of bankruptcy and may not be able to meet their obligations. The Fund may experience higher portfolio turnover which may lead to increased fund expenses, lower investment returns and higher short-term capital gains taxable to shareholders. The Fund invests in repurchase agreements which are considered loans by the Fund and may suffer a loss of principal and interest in the event of counterparty defaults. Current and future portfolio holdings are subject to change.
Touchstone exchange-traded funds (ETFs) are actively managed and do not seek to replicate a specific index. ETFs are bought and sold through an exchange at the then current market price, not net asset value (NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV when traded on an exchange. Brokerage commissions will reduce returns. There can be no guarantee that an active market for ETFs will develop or be maintained, or that the ETF’s listing will continue or remain unchanged.
Please consider the investment objectives, risks, charges and expenses of the ETF carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one at TouchstoneInvestments.com/resources or call Touchstone at 833.368.7383. Please read the prospectus and/or summary prospectus carefully before investing.
Touchstone ETFs are distributed by Foreside Fund Services, LLC.
Wealth Advisor and Touchstone Investments are not affiliated. Wealth Advisor and Foreside Fund Services, LLC, are not affiliated.
