Bond and dividend yields move inversely to a bond’s or stock’s price, meaning there are occasions when an unusually high yield can signal a bond or a stock has been beaten up too much.
On that note, some closed-end funds and the Invesco CEF Income Composite ETF (NYSEARCA: PCEF) could be worth considering by income investors today. That exchange traded fund, which tracks the S-Network Composite Closed-End Fund Index, sports a 30-day SEC yield of 10.20%, as of Oct. 10, according to issuer data.
To be sure, closed-end funds and PCEF usually sport eye-catching yields, but 10.20% is unusually high for the ETF. That’s saying something because PCEF turns 13 years old in February. PCEF’s whopper of a yield is largely due to interest rate tightening by the Federal Reserve.
“When yields spiked in 2020 for high yield bonds, REITs, and closed-end funds, the move was short-lived as the Fed took steps to bolster US financial markets, and yields quickly moderated,” writes Alerian analyst Stacey Morris. “With the Fed focused on bringing down inflation and poised to continue raising rates, today’s yields may mark the start of an extended period of higher rates, instead of the flash in the pan spike seen in 2020. Although with pervasive concerns about a recession, the macro environment remains precarious.”
PCEF has comprised 119 other closed-end funds, which hold a variety of securities, including investment-graded and junk debt and other taxable bonds. Closed-end funds employ various options strategies to gain leverage, which boosts this asset class’s income profile.
Morris notes that the last time PCEF’s underlying index yielded north of 10% was in April 2020 – the midst of the coronavirus bear market. Translation: PCEF is rate-sensitive, indicating that if inflation cools and the Federal Reserve can relent on rate hikes or, at the very least, scale back its aggressive posture, the Invesco fund could benefit.
Bottom line: Caution is advised, but when Treasury yields finally relent, PCEF could be a fixed income leader, indicating it might be offering value in addition to high income.
“As fixed income yields become more attractive, income investors will likely be considering portfolio adjustments depending on their outlook and expectations. While many assets are providing yields at multi-year highs, investors will likely want to take a measured approach against a backdrop of significant macro volatility and uncertainty,” concludes Morris.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
