With safe haven Treasury notes on the rise, fixed income investors are starting to explore some more options. One promising route is debt within the financial sector, attainable via the Invesco KBW High Dividend Yield Financial Portfolio (KBWD).
“Like all investing strategies, high-yield ETFs are a bit of a balancing act,” a Kiplinger article explained. “On one hand, stocks that deliver tremendous yield can be enticing because of ‘guaranteed’ paydays that are two times, three times or even five times the typical dividend stock in the S&P 500.”
“But the truth is there are no guarantees on Wall Street,” the article explained further. “Firms that were very generous last quarter sometimes wind up cutting their dividends this quarter or seeing their shares tumble as a result of poor performance.”
KBWD seeks to track the investment results of the KBW Nasdaq Financial Sector Dividend Yield Index. The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index.
The underlying index is a modified-dividend yield-weighted index of companies principally engaged in the business of providing financial services and products, as determined by the index provider. The underlying index is designed to track the performance of financial companies with competitive dividend yields that are publicly-traded in the U.S.
Focused Exposure
Higher yields will help companies who offer loans as part of their income revenue. Rising inflation is stoking fears of a possible rate hike by the Federal Reserve, despite their stated willingness to remain steadfast in keeping rates low.
As rates rise, this will help profit margins on the higher interest rates of loans and other lending products. It’s not welcome news for borrowers, but a good sign for KBWD investors.
“The list of holdings is pretty small and focused as a result of this tactical approach, with only about 40 total components in this ETF at present,” the Kiplinger article said. “The list of names may not be familiar, with top stocks including Prospect Capital (PSEC), a business development company (BDC), and Apollo Commercial Real Estate Finance (ARI), which operates mainly in the mortgage market.”
“A simple way to play continued yield upside is to favor shorter duration equities over longer duration ones,” says BCA Research. “This implies that investors should hedge against the steepening yield curve by favoring value equities over growth stocks, and the financial sector over tech.”
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