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For some investors, uncertainty in the bond market and a relentless rise in rates driven by inflation, geopolitical concerns and other factors is enough to throw in the towel, or at least significantly limit their exposure to fixed income. While many advisors and strategists said bonds should remain part of a diversified investment portfolio, they are shifting allocation to lower-duration alternatives such as ultra-short bonds. Others are looking for complementary non-fixed income products for investors who want less exposure to bonds. "There are certainly a host of alternative strategies that can create current income in a portfolio," said Tyler Glover, managing director of private wealth management consulting services at William Blair. These options include insurance-linked securities, master limited partnerships, covered call ETFs, dividend-paying stocks, REITS, preferred stocks, asset-backed securities and merger arbitrage trades. To be sure, there are caveats when investing in any of these options. "If you're trying to generate alternative paths to income outside of bonds because of inflation risks and concern over rising rates, there's a tradeoff between adding income from other sources and adding other risk to your portfolio," said Matt Gentzkow, managing director of Coastal Bridge Advisors in Westport, Connecticut. To generate more yield, or alternative sources of yield, you may have to take more risk, Gentzkow said. Investors also have to be careful not to put too many eggs in one basket. "You don't just want one pool of income-generating assets that's exposed to one specific sector," he added. Additionally, some of the most popular income-oriented plays in the stock market are themselves interest-rate sensitive, which can dent the investment case for them. From one perspective, the higher yields in bonds become, the less compelling the case is for more risky alternatives on a yield-only basis. But with many major bond categories suffering through a punishing period of negative performance as rates have risen quickly, investors are seeking income alternatives for reasons beyond yield-alone. With these caveats in mind, here are three broad categories with multiple investment options for investors seeking income outside traditional bonds. 1. Staying within fixed income, but non-traditional bonds Insurance-linked securities Paul Karger, co-founder and managing partner of TwinFocus Capital Partners in Boston, favors catastrophe bonds, also known as cat bonds, which are high-yield insurance-linked securities that allow insurers, reinsurers and governments to transfer the risk of natural disasters to capital market investors. The class often offers mid-to-high-single-digit returns, but the last several years have been unusually strong, with performance that's not directly tied to traditional financial markets. Returns, however, can be negative in a year when there is a much higher than average incidence of catastrophes and insurance claims have to be paid out. Karger's firm allocates 3% to 5% to cat bonds in almost all of its portfolios through mutual funds. Artemis, for example, has a primary focus in this market, with the Victory Pioneer CAT Bond Fund (CBYYX) recently surpassing $2 billion in assets under management. One example of an ETF in this space is the Brookmont Catastrophic Bond ETF (ILS). It had a year-to-date total market return of 5.57% as of August 31, but features a high net expense ratio for an ETF, 1.58% as of June 30. 2. Equities that generate income Dividend-paying stocks Dividend-paying stocks are not a direct substitute for bonds, but they provide an opportunity for income through capital appreciation and dividend growth. The tradeoff is higher volatility and market risk and the need to ensure you aren't overweighted in equities. Generally, dividend ETFs are low-cost, and there are plenty of ETFs to choose from. Capital Group Dividend Value ETF (CGDV), Fidelity High Dividend ETF (FDVV) and JPMorgan Dividend Leaders ETF (JDIV) are among the best for passive income in 2026, according to Morningstar. Real estate investment trusts REITs can provide income and total return over time, but they carry "a different risk profile than a bond," said Glover. Publicly traded REITS are constantly repriced, so there's traditionally more volatility in real estate versus bonds. With REITs, investors earn income by collecting regular dividends and realizing capital gains from share price appreciation. Top REIT ETFs, according to Morningstar, include Dimensional US Real Estate ETF (DFAR), Schwab US REIT ETF (SCHH) and SPDR Dow Jones Global Real Estate ETF (RWO). Master limited partnerships (MLPs) These are publicly traded partnerships that generally invest in various parts of the energy sector, such as oil, gas and transportation. These funds typically offer high dividend yields and tax-advantaged income, as MLPs distribute most of their cash flows to shareholders. A lot of investors find them attractive because of the higher yields, said Michael W. Crook, chief investment officer at Janney Montgomery Scott in Philadelphia. This was especially true after the pandemic when rates were so low. But that does not make a compelling case for them in the current rising rate environment. Crook isn't as excited about them given their interest rate sensitivity and that the 10-year Treasury is trading in the upper 4% range. "It's a very different environment than when the 10-year Treasury was paying in the 1% range or lower back in 2021." For investors interested in MLPs, there are several ETFs to choose from. One option could be the Global X MLP ETF (MLPA), which invests in midstream pipelines and storage facilities that have less sensitivity to energy prices. Its 30-day SEC yield was 6.82% as of Sept. 4. Preferred stocks Preferred stocks can provide ongoing expected income in a portfolio. They are often senior to common public stock. However, preferred stocks are sensitive to interest rates, and investors have to be careful not to overdo their equity portfolio. These investments can be purchased as individual securities or funds. There are multiple ETFs to choose from. One option is the iShares Preferred & Income Securities ETF (PFF). It had a 30-day SEC yield of 6.52% as of July 31 with an expense ratio of 0.45%. 3. Alternative investment funds Merger arbitrage Jeff Mortimer, founder partner and chief investment officer of Elyxium Wealth in Beverly Hills, California, has been looking at income-oriented investments such as merger arbitrage ETFs and actively managed merger arb funds. Merger arbitrage takes advantage of the price gap between the announcement of a merger and its completion, offering returns uncorrelated with interest rate risk. The strategy produces a bond-like risk/return profile outside of the fixed-income market, according to Morningstar, which notes, "The upside is limited, akin to a bond's coupon, but the downside loss potential is significantly larger if the deal breaks." Some options for merger arb ETFs include the NYLIM Merger Arbitrage ETF (MNA), which had 68 holdings and expense ratio of 0.77% at the end of June. Another option is the AltShares Merger Arbitrage ETF (ARB), which had 62 holdings and an expense ratio of 0.76% at the end of June, and the ProShares Merger ETF (MRGR), which had 41 holdings at the end of July and an expense ratio of 0.75%. 4. Alternative forms of lending Asset-backed securities Given upward pressure on bond yields, Stuart Katz, chief investment officer at San Francisco-based Robertson Stephens, has been focusing on bonds with lower duration and is also looking outside bonds for yield, taking into account risk and tax efficiency. One way he's doing this is through alternative private market strategies. His firm looks for private managers that lend against real assets such as rail cars, gas-producing wells and hard collateral. These investments tend to be shorter in duration than a typical investment-grade bond, often in the one-to-three-year time frame. Broadly, collateralized asset-backed lending opportunities are generating tax-deferred yields in the 6%-10% range, Katz said. Asset-backed securities aren't as sensitive to rising rates, and in some cases would benefit. However, there's liquidity risk, the potential for asset depreciation, and there could be concerns about collateral collection. One ETF option is the Janus Henderson Asset-Backed Securities ETF (JABS), which seeks to generate income by actively allocating to opportunities across the U.S. consumer lending market. Its net expense ratio is 0.33%.
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