Eric Lutton

Eric Lutton started on the floor of the Chicago Board Options Exchange, where he first saw grown men throw punches at each other in the pits. From there he moved to Conseco Capital Management in Indianapolis managing about $36 billion in insurance company money, pension funds, and Asian institutional capital in the late 1990s. That's where he got deep into fixed income: deep dives into company valuations, going through 10-Ks and 10-Qs, getting on management calls. After stints running fixed income at a private bank in South Florida, working at an RIA/hedge fund, and spending time on the sell side helping RIAs build bond portfolios and trade fixed income, he connected with Dave Strand about a decade ago. Dave came from the insurance side and understood how important income is to retirees. Sound Income Strategies has grown from one advisor and roughly $30 million to over 100 advisors and $3.7-3.8 billion, all organic growth with no books of business acquired.

On this episode of Behind the Ticker, Eric breaks down FXED, Sound Income's fixed income ETF that blends traditional bonds with higher-yielding alternatives like BDCs, REITs, and preferreds to target yields in the upper 6% range for retirees who need income without taking on equity-level risk.

Filling the Fixed Income Gap

FXED exists because Eric saw a gap in the market. Traditional bond ETFs don't generate enough income for retirees. The Agg might yield 4-something percent, and for someone in retirement who needs to fund their spending, that's not enough. But there wasn't a fixed income ETF that combined traditional bonds with higher-yielding alternatives in a single portfolio. Most advisors were forced to build this blend themselves using multiple holdings. FXED packages it into one product.

"We're right now in the upper sixes," Eric said about the fund's projected yield. The majority of the return comes from income, not capital appreciation. The product is designed so retirees don't have to go chasing growth just to generate spending money. "If we can yield 6.8, 6.9 and the majority of that return is coming from income and we're meeting that need, I think it's better for them to put it in something like ours than eating up a bunch of capital."

How the Portfolio is Built

The fund holds traditional fixed income alongside BDCs, equity REITs, and preferred securities. On the REIT side, Eric is particular. He focuses on equity REITs with real property and real cash flows rather than mortgage REITs where you're betting on management's ability to play the interest rate spread game. He deals with 11 or 12 different REIT sectors but stays away from mortgage REITs.

For healthcare REITs, he looks at how they came through COVID, how Medicaid and Medicare reimbursement affects them, whether their operators are managing costs effectively (skilled nursing facilities and hospitals saw costs get out of control). For triple-net lease REITs, he digs into tenant quality: are they investment-grade tenants? Big box stores that aren't going out of business? How long are the lease terms? "You're looking at all these agreements to try to justify that this REIT is not going to have a problem with their dividend any time soon," Eric explained. "In fact, they're probably in the future years going to look to increase those dividend yields."

For BDCs, Eric approaches them like a traditional credit analyst: examining leverage ratios, management quality, and the underlying loan books. Good managers keep leverage low. He's looking for BDCs where the dividend is sustainable, not a yield trap.

Capital Preservation vs. Income Generation

Eric acknowledged the tension directly. "Whether we like it or not, our global financial system is hard-coded to force us all into some level of risk. Otherwise, inflation's going to eat away our capital over time." The balance is generating enough income to stay ahead of inflation without exposing retirees to drawdowns they can't stomach.

He recalled 2022, the worst fixed income market in decades and the worst U.S. Treasury market ever. There were times he wanted to go 30% cash and play golf because things were going to get bad. But retirees using FXED get a dividend every two weeks. You can't just park in cash because someone is depending on that income stream. The strategy aims to provide yield while managing risk so retirees aren't forced to load up on equities just to meet income needs. Brad pointed out that not long ago, the only place to get income was in equities, and the excess risk retirees were forced to take in the 2020 zero-rate environment was something advisors constantly struggled with. A product like FXED with yields north of 6% is healthy in that context.

The Firm's Growth Story

Sound Income also launched DIVI, a high-dividend equity strategy focused on value, blue-chip companies. Eric admitted it's a more boring approach than chasing growth and AI. But the firm's niche is clear: income for near-retirement and retired clients. Growing from $30 million to $3.8 billion organically over a decade, without buying any books of business, says something about the advisor demand for this kind of focused income approach.

Key Takeaways

• FXED blends traditional bonds with BDCs, equity REITs, and preferred securities to target yields in the upper 6% range, paying dividends every two weeks.
• Sound Income Strategies has grown from $30 million to $3.7-3.8 billion in a decade, all organically, with over 100 advisors.
• The fund focuses on equity REITs rather than mortgage REITs, analyzing real property cash flows, tenant quality, lease terms, and management's ability to grow dividends.
• Eric's credit analysis background from Chicago trading floors to $36 billion in insurance company money informs the due diligence on every BDC and REIT in the portfolio.
• The strategy is designed for retirees who need income today. Eric's view: forcing retirees into growth equities to generate spending money creates more risk than a well-constructed higher-yielding fixed income portfolio.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.