Alternative High-Income ETFs
February 22nd 2013 at 12:55pm by Tom Lydon
When ETF investors want income, they usually think about go-to sectors such as high-yield bonds and dividend stocks. However, there are other places investors can look to boost income with money market funds and U.S. Treasuries paying next to nothing.
“At current valuations, stocks look much more attractive than bonds and will deliver much better returns in the longer-term. Most large US blue chips are sitting on piles of cash and are in position to increase dividends. High quality dividend ETFs currently have ~2.5% dividend yield and excellent longer-term capital appreciation potential,” Neena Mishra wrote for Zacks.
Once rates begin to turn, bond ETFs will start to lose value. Neena Mishra explains that the 10-year Treasury note already broke the 2% threshold this year , and junk-bond ETFs are getting riskier every day. In fact, some large institutional investors have pared junk bond holdings or started taking short positions in the bond market.
Investors could look at income yielding equity ETFs such as the Guggenheim Multi-Asset Income ETF (NYSEArca: CVY) which allocates 70% of holdings to U.S. stocks and 17% of holdings to global equities. The 5.1% yield and 0.60% expense ratio are decent, especially hen one considers the array of asset classes represented, including equities, ADRs, REITs, MLPs, CEFs and preferred stocks. CVY has returned 6.3% year-to-date. [All in One ETFs with Attractive Yields]
Mishra points to PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) as another option, which focuses in on foreign government bonds issued in U.S. dollar denominations. The emerging economies that are represented are on a much more intense growth cycle than developed nations at the moment, offering investors a nice diversification benefit, and more of a chance at capital appreciation. A 4.8% yield pairs nicely with the 0.48% expense ratio. PCY is down 3.5% year-to-date. [Income-Producing ETFs Back in Focus as Bond Yields Fall Again]
Lastly, the JP Morgan Alerian MLP Index ETN (NYSEArca: AMJ) is an exchange trade note, which is a debt instrument. It has a 4.7% yield. MLPs do offer a nice yield and the chance for capital appreciation. The MLP has become a safer way to play the energy sector, presenting lower volatility and good diversification benefits. AMJ has returned 13.9% year-to-date. [MLP ETFs Still Have Potential Despite Tax Concerns]
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.