Ten-year Treasury yields have plunged 26.2% this year, prompting investors to push billions into income-generating asset classes and exchange traded funds.
The more than $10 billion that has flowed into dividend ETFs, a number that has helped drive the ongoing growth of strategic beta growth, is just one example of how income investors are coping with a low interest rate environment. [ETFs Hit $2 Trillion in AUM]
Well-established and some newer ETFs can help investors take a dynamic approach to generating current income. Standard & Poor’s Investment Advisory Services’ portfolio strategy committee combines fundamental analysis with the Black-Litterman model, a mean-variance tool, in an effort to unearth current income opportunities among ETFs.
“The strategically focused Current Income MAPs, provides exposure to certain U.S. and international equity and various fixed income sub-asset classes, such as short-term investment grade, mortgage-backed and high-yield, is managed to avoid unnecessary turnover. Yet, certain styles are favored over others and asset allocation changes typically occur two or three times a year. For the Purchasing Power Preservation strategy, which has a 30% equity/70% fixed income split, the latest changes were made in early November,” said S&P Capital IQ in a new research note.
The strategy recently reduced its exposure to ex-U.S. developed market equities in favor of the Vanguard REIT ETF (NYSEArca: VNQ). VNQ is undoubtedly an investor favorite. Not only is the fund the largest REIT ETF, but it has hauled in $4.66 billion in new assets this year, a total surpassed by just six other ETFs. [REIT ETFs Loving Low Rates]
REITs provide a liquid alternative to owning physical commercial real estate properties. REITs investments also share similar attributes with stocks and bonds. Since REITs are required to distribute at least 90% of their income from rent payments to investors, these real estate investments can generate attractive yields.
S&P Dow Jones Indices and MSCI (NYSE: MSCI), two of the largest providers of benchmarks for exchange traded funds, recently announced that real estate will become the eleventh Global Industry Classification Standard (GICS) sector, breaking off REITs from the broader financials sector. [Sector Classification Change Could Boost REITs ETFs]
“A total of 11 relatively low-cost ETFs are used in the Current Income risk profiles. The average expense ratio for the MAPs ranges between 0.21% and 0.23%, providing allocations to what SPIAS views as high-quality, low-cost asset allocation vehicles,” according to S&P Capital IQ.
Another income-generating ETF favored by the strategy is the Vanguard Total International Bond ETF (NYSEArca: BNDX). BNDX debuted last year and has quietly become a $2.8 billion ETF, a rise helped in part by the fact that it is the premier currency hedged bond ETF.
BNDX ries to reflect the performance of the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index, which includes government, agency, corporate and securitized non-U.S. investment-grade fixed income investments issued in foreign currencies but also includes a hedge to its currency exposure. [Spotlight on Global Hedged Bond ETF]
Home to 3,100 bonds, BNDX has an all-investment grade lineup and an average duration of 7.1 years. BNDX charges just 0.2% per year, making it less expensive than 81% of comparable funds, according to Vanguard.
Vanguard REIT ETF
