Investors Seek Income Alternatives as Rising Rates Reshape Bond Portfolios

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City on September 09, 2026.

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As inflation, geopolitical tensions and other pressures push interest rates higher, some investors are reducing their exposure to fixed income amid growing uncertainty in the bond market.

Many advisors and strategists still recommend bonds as an important part of a diversified portfolio, but they are increasingly turning to lower-duration instruments and other income-producing assets. Tyler Glover, managing director of private wealth management consulting services at William Blair, said alternative strategies can provide current income while helping diversify a portfolio.

Possible alternatives include insurance-linked securities, master limited partnerships, covered-call ETFs, dividend stocks, real estate investment trusts, preferred shares, asset-backed securities and merger arbitrage.

These investments carry important tradeoffs. Matt Gentzkow, managing director at Coastal Bridge Advisors in Westport, Connecticut, said investors seeking income outside bonds must weigh the additional yield against the risks added to their portfolios. He cautioned against relying too heavily on assets tied to one sector. Some of the most popular equity-based income strategies also remain sensitive to interest rates, which can weaken their appeal when yields rise.

With those considerations in mind, investors have four broad categories of alternatives to explore.

1. Fixed income beyond traditional bonds

Insurance-linked securities

Paul Karger, co-founder and managing partner of Boston-based TwinFocus Capital Partners, favors catastrophe bonds, or cat bonds. These high-yield insurance-linked securities enable insurers, reinsurers and governments to transfer natural-disaster risk to capital-market investors.

The category has often produced returns in the middle to high single digits. Recent years have been particularly favorable, with performance only loosely connected to traditional financial markets. However, cat bonds can generate negative returns when catastrophe frequency and insurance claims are unusually high.

TwinFocus allocates 3% to 5% of nearly all its portfolios to cat bonds through mutual funds. Artemis is a specialist in this market, and its Victory Pioneer CAT Bond Fund (CBYYX) recently surpassed $2 billion in assets under management.

The Brookmont Catastrophic Bond ETF (ILS) is one exchange-traded option. It posted a year-to-date total return of 5.57% as of August 31, although its 1.58% net expense ratio was high for an ETF as of June 30.

2. Income-producing equities

Dividend-paying stocks

Dividend stocks are not a direct replacement for bonds, but they can provide income through dividend payments and potential capital appreciation. Investors must accept greater volatility and equity-market risk while ensuring that their portfolios are not overly concentrated in stocks.

Most dividend ETFs have relatively low costs and offer broad choice. According to Morningstar, Capital Group Dividend Value ETF (CGDV), Fidelity High Dividend ETF (FDVV) and JPMorgan Dividend Leaders ETF (JDIV) were among the strongest choices for passive income in 2026.

Real estate investment trusts

REITs can deliver both income and total return, but they do not carry the same risk profile as bonds, Glover said. Because publicly traded REITs are continuously repriced, their prices have traditionally been more volatile than bond prices.

Investors can earn money from regular dividends and capital gains as share prices appreciate. Among the leading REIT ETFs identified by Morningstar are Dimensional US Real Estate ETF (DFAR), Schwab US REIT ETF (SCHH) and SPDR Dow Jones Global Real Estate ETF (RWO).

Master limited partnerships

MLPs are publicly traded partnerships that generally invest in areas such as oil, gas and transportation infrastructure. They typically distribute substantial cash flows to shareholders, producing high dividend yields and potentially tax-advantaged income.

Their elevated yields have long attracted investors, particularly during the pandemic-era environment of very low interest rates. Michael W. Crook, chief investment officer at Janney Montgomery Scott in Philadelphia, said that appeal has diminished as rates have climbed. With the 10-year Treasury yield in the upper 4% range, he sees less promise in MLPs than when the benchmark was yielding 1% or less in 2021.

Several ETFs provide exposure to the asset class. The Global X MLP ETF (MLPA) invests in midstream pipelines and storage facilities that are generally less sensitive to energy prices. Its 30-day SEC yield was 6.82% as of September 4.

Preferred stocks

Preferred shares can supply a stream of expected income and generally rank above common stock. However, they are sensitive to interest rates, so investors should avoid making them an excessive portion of their equity holdings. Preferred shares can be purchased individually or through funds.

The iShares Preferred & Income Securities ETF (PFF) is one ETF option. It had a 30-day SEC yield of 6.52% as of July 31 and 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 examined merger-arbitrage ETFs and actively managed funds as potential sources of income.

The strategy seeks to profit from the price difference that exists between a merger announcement and the deal’s completion. It can generate returns that are not directly tied to interest-rate risk and may resemble the risk-and-return profile of a bond, according to Morningstar. Upside is generally limited, much like a bond coupon, but losses can be substantially larger if a transaction fails.

The NYLIM Merger Arbitrage ETF (MNA) held 68 securities and charged an expense ratio of 0.77% at the end of June. The AltShares Merger Arbitrage ETF (ARB) had 62 holdings and a 0.76% expense ratio at the end of June. The ProShares Merger ETF (MRGR) held 41 securities and charged 0.75% as of the end of July.

4. Alternative lending strategies

Asset-backed securities

Rising bond yields have encouraged Stuart Katz, chief investment officer at San Francisco-based Robertson Stephens, to focus on lower-duration bonds while also evaluating income opportunities outside the fixed-income market, with attention to risk and tax efficiency.

One approach is private-market lending secured by real assets such as railcars, producing gas wells and other hard collateral. Katz’s firm seeks private managers that provide this financing. These investments generally have shorter durations than conventional investment-grade bonds, often lasting one to three years. Katz said broadly diversified, collateralized asset-backed lending opportunities are producing tax-deferred yields of roughly 6% to 10%.

Asset-backed securities may be less vulnerable to rising rates and could benefit in some circumstances. Investors still face liquidity risk, the possibility that collateral will lose value and the potential difficulty of collecting or selling secured assets.

The Janus Henderson Asset-Backed Securities ETF (JABS) seeks income by actively investing across the U.S. consumer-lending market. Its net expense ratio is 0.33%.

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