As we look to the fixed-income environment, investors may consider unique yield-generating exchange traded fund ideas to help diversify an income-focused portfolio.
In the recent webcast, Seeking Yield: A Different Approach to Generating Income, Sean O’Hara, President, Pacer ETFs Distributors, highlighted a trend following strategy, the Pacer TrendPilot US Bond ETF (PTBD), that provides dynamic market exposure to help investors quickly hedge risks when markets turn volatile. The strategy follows strict guidelines with three indicators, including a high yield indicator, a 50/50 indicator, and a T-bill indicator.
The High Yield Indicator refers to when the Risk Ratio, or the change between the S&P U.S. High Yield Corporate Bond Total Return Index and the S&P U.S. Treasury Bond 7-10 Year Total Return Index, closes above its 100-day simple moving average for five consecutive business days, and the exposure will be 100% to the Benchmark Index. The Index will then change to the 50/50 position or the T-Bond position depending on the 50/50 Indicator and the T-Bond Indicator.
The Price Signal 50/50 Indicator refers to when the Risk Ratio closes below its 100-day SMA for five consecutive business days, the exposure will be 50% to the S&P U.S. High Yield Corporate Bond Total Return Index and 50% to S&P U.S. Treasury Bond 7-10 Year Total Return Index. From the 50/50 position, the Trendpilot Index will return to the high yield position or change to the T-Bond position, depending on if the indicators are triggered.
Lastly, the Trend Signal T-Bond Indicator refers to when the Benchmark Total Return Index’s 100-day SMA closes lower than its value from five business days earlier, and the exposure will be 100% to Treasury bonds. From the T-Bond position, the Trendpilot Index will change to the high yield position when the High Yield Indicator is triggered. It will not return to its 50/50 position unless the High Yield Indicator is first triggered.
The goal is to minimize potential drawdowns during broad market sell-offs. For example, the Pacer Trendpilot US Bond Index exhibited a maximum reduction of 8.1% for the 15 years ended 2019, compared to the 32.7% max drawdown for the S&P U.S. High Yield Corporate Bond Index and the -10.2% max drawdown in the S&P U.S. Treasury Bond 7-10 Year Total Return Index.
The Importance of Dividend Payers
O’Hara also underscored the importance of dividend payers with robust free cash flow yield to measure the sustainability of a company to produce higher returns with lower volatility over time. Companies with high free cash flow and high dividends have historically exhibited lower drawdowns during periods of market volatility. Furthermore, companies with high cash flows are better positioned to grow and maintain dividends.
Investors interested in the free-cash-flow metric as a focused factor can look to something like the Pacer Global Cash Cows Dividend ETF (NYSEArca: GCOW). The underlying cash cows dividend strategy first selects the top companies with the highest free cash flow yields, and it is further whittled down by screening for those with the highest dividend yields.
Similarly, the Pacer Global Cash Cows Dividend ETF can produce improved risk-adjusted returns with lower drawdowns over the long haul while allowing investors to capture upside potential. Specifically, GCOW showed an 81.1 downside capture ratio, compared to the broader FTSE Developed Large-Cap Index, and the ETF also exhibited a 94.1 upside capture ratio to the benchmark index.
Furthermore, O’Hara pointed to a revolution in the energy space and the potentially attractive income opportunities in the midstream energy infrastructure segment. Specifically, the Pacer American Energy Independence ETF (USAI), which is comprised of both corporations and master limited partnerships or MLPs, offers exposure to the growth potential of infrastructure development supporting domestic energy supplies.
Instead of focusing on MLPs exclusively, USAI tilts towards the largest energy infrastructure companies. The ETF follows the American Energy Independence Index, which includes U.S.- and Canada-based energy infrastructure companies, along with high-yielding master limited partnerships and general partners. Since it does not focus exclusively on MLPs, USAI can sidestep some of the tax inefficiencies we may see in the MLP market.
Unlike other energy segments, the infrastructure segment may be more insulated against volatile crude oil pricing. For instance, the sector has demonstrated its resilience, even when faced with severe price pressures in recent years. As the U.S. becomes more energy independent, the new developments will benefit North American infrastructure businesses, MLPs and GPs
Financial advisors who are interested in learning more about income-generating ideas can watch the webcast here on demand.