Finding attractive yields in traditional stocks and bonds has become a laboring endeavor. Consequently, more are turning to alternative exchange traded fund strategies to boost their income portfolios.
On the recent webcast (available On Demand for CE Credit), Alternative Approaches to Yield in the Current Environment, Jon Maier, SVP and Chief Investment Officer for Global X Funds, pointed out that it has become harder and harder for long-term investors to achieve a 4% income target. Since 1960, 10-year U.S. Treasuries have averaged a yield of 6.3%, but the T-notes now only come with a 2.22% yield.
“With 10 year treasuries yield around 2% to 2.5%, and inflation at about 2%, the expected real return on these assets is close to zero,” Maier said.
This poses a huge problem for a growing percentage of the investing population, notably baby boomers and the silent generation, with over 100 million people and over 80% of household wealth. For instance, men on average are now living 20 years in retirement, compared to an average 13 years in 1962.
Meanwhile, investors are taking on greater risks to achieve the level of income generation they want.
“The premiums associated with taking on duration or credit risk are well below their 10 year averages, indicting that a high level is risk is needed to achieve higher yield targets,” Maier said.
Due to the low-yield environment and increasing demand for yield-generating assets, more investors are looking toward alternative sources of income outside traditional debt assets. For instance, some assets that offer yields above 4% include master limited partnerships, high-yield bonds, preferreds, emerging market bonds and real estate investment trusts.
Jay Jacobs, VP and Director of Research at Global X Funds, also pointed out that investors are looking to dividend-paying stocks to bolster yields, notably high dividend, dividend growth and quality dividend strategies. However, each come with their own setbacks.
“High dividend strategies tend to have the highest yields, but sacrifice earnings growth and quality metrics like return on equity (ROE),” Jacobs said. “Quality dividend strategies tend to improve ROE, but have lower yields. Dividend growth strategies can have higher earnings growth, but less yield as well.”
Investors who are looking for high-dividend payers may consider something like Global X’s SuperDividend suite of ETFs, including Global X SuperDividend ETF (NYSEArca: SDIV), Global X SuperDividend U.S. ETF (NYSEArca: DIV), Global X MSCI SuperDividend EAFE ETF (NASDAQ: EFAS) and Global X SuperDividend Emerging Markets ETF (NYSEArca: SDEM), which select some of the highest yielding securities across various geographies and asset classes.
“As a result of the SuperDividend strategy, our funds have historically demonstrated higher yields than their asset classes’ respective benchmarks,” Jacobs said.
SDIV has a 6.59% 12-month yield. DIV has a 6.21% 12-month yield. EFAS has a 5.59% SEC yield. SDEM has a 4.55% 12-month yield.
Investors can also find more attractive income opportunities in alternative assets like the the Global X SuperIncome Preferred ETF (NYSEArca: SPFF) and Global X MLP ETF (NYSEArca: MLPA). SPFF has a 6.91% 12-month yield. MLPA has a 7.22% 12-month yield.
“There are three main reasons why investors may be interested in MLPs: yield potential, thematic growth potential, and diversification opportunity,” Jacobs said.
MLPs pay no income tax at the corporate level, providing more cash flows to investors. MLPs also stand to benefit from the long-term outlook for oil and natural gas output in the U.S., especially with shale production ramping up. The space also exhibits low correlation to broad equity and fixed income assets, which helps diversify a portfolio.
“We believe investors may also want to consider preferreds as a high income alternative to bonds,” Jacobs added.
Preferreds exhibit characteristics of both bonds and equities, tend to have higher yields than corporate bonds given their junior status on the capital structure, are often considered qualified dividends, are advantageous to taxable investors compared to traditional fixed income and have historically demonstrated low returns correlations to other asset classes.
Financial advisors who are interested in learning more about alternative yield-generating strategies can watch the webcast here on demand.