For the exchange traded fund investors who are reluctant to just sit idly by while the government hikes up taxes and diminishes overall wealth, PIMCO’s resident bond guru, Bill Gross, suggests a couple of steps to hedge the pending wealth tax.
Gross manages the PIMCO Total Return ETF (NYSEArca: BOND).
“Buy intermediate Treasuries and roll down a near perpetually steep yield curve,” Gross said.
- iShares Barclays 3-7 Year Treasury Bond Fund (NYSEArca: IEI): 0.53% 30-day SEC yield
- Schwab Intermediate-Term U.S. Treasury ETF (NYSEArca: SCHR): 0.70% 30-day SEC yield
- PIMCO 3-7 Year U.S. Treasury Index Exchange-Traded Fund (NYSEArca: FIVZ): 0.50% 30-day SEC yield
Gross expects the Treasury yield curve to remain steep for the foreseeable future. Consequently, yields on mid-term Treasuries, or those between 4 and 10 years, will remain higher than short-term notes. If investors hold an intermediate Treasury, the value would increase as it matures, and investors would also “roll down” the yield curve by selling it when it has a shorter term maturity. [PIMCO Total Return ETF Manager Gross Trims Mortgages, Treasuries]
“5-10 year TIPS in US and UK,” Gross said. “Central Bank inflation targets moving up.”
- iShares Barclays Treasury Inflation Protected Securities Fund (NYSEArca: TIP): 1.76% 30-day SEC yield
- PIMCO Broad U.S. TIPS Index Exchange-Traded Fund (NYSEArca: TIPZ): 1.47% 30-day SEC yield
- Schwab U.S. TIPS ETF (NYSEArca: SCHP): 4.46% 30-day SEC yield
Treasury inflation-protected securities, or TIPS, will hedge against inflation, rising in value along with increases in inflation.
“For stocks, focus on steady cash flow/dividends in an unstable economy,” Gross said.
- Vanguard Dividend Appreciation ETF (NYSEArca: VIG): 2.25% 30-day SEC yield
- iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY): 3.57% 30-day SEC yield
- SPDR S&P Dividend ETF (NYSEArca: SDY): 2.83% 30-day SEC yield
If growth seems unsteady, dividend paying stocks provide a steady cash flow and will remain relatively stable, compared to other other stocks. If economy turns around, these companies will also benefit.
“Invest in developing economies w attractive balance sheets: Brazil, Mexico, best examples,” Gross tweeted. “Stocks & bonds.”
- Vanguard Emerging Markets ETF (NYSEArca: VWO)
- iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM)
- iShares MSCI Brazil Index Fund (NYSEArca: EWZ)
- iShares MSCI Mexico Index Fund (NYSEArca: EWW)
Fiscally, developing countries, like Brazil and Mexico, look healthier than developed economies. Emerging markets are low on debt, have better demographics and are in a better position to expand economically.
Lastly, Gross suggests looking into “real assets.”
If inflation does begin to rise, prices on real physical assets, like gold, will hold value.
For more information on the markets, visit our current affairs category.
Max Chen contributed to this article.’
Full disclosure: Tom Lydon’s clients own BOND, GLD, EEM, TIP and DVY.