Some ETF sectors that investors have favored for yield in recent years have taken a hit lately on rising interest rates. But the recent damage doesn’t necessarily mean investors should give up on these asset classes.
“The last three months of soaring interest rates have thrown many high yield investors for a loop and left them wondering whether to buy, sell or hold their favorite dividend powerhouses. By analyzing [particular asset classes] we can determine which are healthy and which may need more time to stabilize,” David Fabian wrote for Minyanville.
The four main areas of the market known for high yield are REITs (real estate investment trusts), junk bonds, preferred stocks and MLPs (master limited partnerships), according to Fabian. So far, the hardest hit sector has been the mortgage REIT area of the market, reports Fabian. The iShares Mortgage Real Estate Capped ETF (NYSEArca: REM) is down 20% from its previous high. [Mortgage REIT ETFs Hit as Interest Rates Surge]
However, before investors write this ETF off, consider the 13.77% yield. Mortgage REITs did well in the low interest rate environment due to the low borrowing costs to purchase long term debt. As credit tightens borrowing costs will go up and REITs will not be able to sustain their high yield.
On the flip side, certain high yield bond and preferred shares ETFs are now sitting just below their 200 day-moving-averages which signals an entry point for some investors. The SPDR Barclays High Yield Bond ETF (NYSEARca: JNK) and the iShares US Preferred Stock ETF (NYSEArca: PFF) are 5% under their highs and are in negative territory. The yield of these ETFs is between 5% and 6% with the possibility of price appreciation. [Dividend ETFs, Yield Producing Equities Back in Focus]
The Alerian MLP ETF (NYSEArca: AMLP) is sporting a yield of about 6% and is sitting near 2013 highs. The strength in oil prices, around $100 per barrel, has supported the performance of the fund. The ETF does not invest in oil, rather it is a play on oil and energy infrastructure. The current performance of the ETF makes it a compelling high yield investment. [MLP ETF For Yield, Diversification]
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own AMLP, REM and JNK.