The current environment of deleveraging debt has suppressed interest rates on traditional fixed-income investments. Consequently, investors will need to seek out other areas, such as corporates, emerging markets and Europe exchange traded funds, to fulfill their income needs.
The U.S. is currently suffering from a large debt-overhang, following the 2008 financial crash, Morningstar analyst Samuel Lee said.
“In prior situations in which this debt overhang situation has occurred, interest rates have stayed low for decades,” Lee said, “and as the experience has borne out so far, interest rates have stayed low contrary to many investors’ expectations. And you can also expect, I think, the government to also keep interest rates low because their debt levels are very high.”
Nevertheless, investors can find opportunities for income generation in some areas of the ETF universe.
“The best places are probably high-yielding asset classes that are a step or two below the highest-yielding stuff,” Lee added.
For instance, the PIMCO 0-5 Year High Yld Corp Bond Idx ETF (NYSEArca: HYS) offers a 4.12% 30-day SEC yield.
“That’s not a great eye-popping yield, but shorter-maturity junk bonds tend to be a lot safer than their longer-duration junk bonds,” Lee advised. “So, I do not advise people to go too far out on the maturity spectrum or too low on the credit-quality spectrum when they’re looking for yield.”
Additionally, investors may consider emerging market debt, as the governments have maintained relatively healthy balance sheets.
Lee suggests looking at the WisdomTree Emerging Markets Local Debt (NYESEarca: ELD), which has a 3.7% 30-day SEC yield, and the PowerShares Emerging Mkts Sovereign Debt (NYSEArca: PCY), which has a 4.03% 30-day SEC yield. [Six Emerging Market Bond ETFs with Attractive Yields]
Additionally, Lee points out that European stocks are offering attractive yields, as well. For instance, the Vanguard MSCI Europe ETF (NYSEArca: VGK) has a 6.59% yield. [Dividend and International ETFs for the U.S. Fiscal Cliff]
“I do like Europe as a yield opportunity because you not only have that yield, but you also have the chance of a revaluation,” Lee said.
For more information on fixed-income assets, visit our bond ETFs category.
Max Chen contributed to this article.