A lot of people are stuck in their traditional stock and bond asset split, but with exchange traded fund products, investors can diversify and expand on traditional allocations to augment their current income. Low-volatility and dividend ETFs are attractive options for yield.
In a recent webcast, Morninstar analyst Samuel Lee pointed out that there are valuation-conscious ways to generate more income in an income-tilted investment portfolio.
First off, Lee explained that “investors often focused on headline yield rather than real yield.” Consequently, when determining real yield, investors have to account for options costs – the call options that allow issuers to redeem bonds in case interest rates fall, default rates and inflation.
Lee also highlighted the fact that most investors don’t make the distinction between yields and performance.
“In bonds, higher-yields usually mean lower risk-adjusted returns,” Lee said. “In high yield bonds, lower yield has produced higher total returns.”
The same can be said about the equities market.
“Extremely high-yielding equities (top 10%) have historically underperformed lower-yielding equities (top 20%-50%) and with higher volatility,” Lee added.
Consequently, Lee suggests investors should begin looking at low-volatility equity options in both the U.S. and foreign markets.