As ETF investors explore ways to find income in this new zero-bound world, many are looking to targeted strategies that could help enhance a traditional fixed-income portfolio.
In the recent webcast, High Yield: Strategies for Volatile Markets, Sean Edkins, Head of ETF Sales and Strategic Partnerships, DWS, took an overhead macroeconomic view of the current global economy and projected stimuli to prosper by 2021 fully. DWS has projected little to no growth across many developed economies for 2020, adding economies may start to churn out positive growth in the third quarter with normal growth likely to return to some by 2021. However, for now, DWS warns of the ongoing negative impact of coronavirus or COVID-19 in 2020 as long-lasting disruptions to supply chains and consumer spending mutes the short-term outlook.
“We believe there will almost certainly be a sharp, but hopefully a short recession,” Sonja Hildebrandt, Vice President | Co-Head CIO Office, DWS, said. “We believe, the different degrees to which the countries will be affected will depend on their respective economic structures, the timing of the occurrence of the virus, and assumptions about the prevention measures taken.”
Gauging the fixed-income market, Hildebrandt said they would tactically stay on the sideline for U.S. Treasuries as the situation around corona infection spreading remains fluid and volatility spikes regularly. DWS maintains a lower for longer yield outlook as we head toward a low-growth period.
“Expect Fed to keep policy accommodation and Fed Funds rate target low for years to come,” Stephen Blumenthal, Executive Chairman and Chief Investment Officer, CMG Capital Management Group, said.
Hildebrandt argued that high yields offer potentially attractive relative values after the sell-off in risk assets. For example, when looking at high yield dollar price going back to 2002, high-yield bonds have returned an average 31.2% following periods when the dollar price traded below $85 – the high yield dollar price was trading at an average $87.1 as of mid-April.
Marc Pfeffer, Chief Investment Officer, CLS Investments, highlighted other potential income opportunities, including investment-grade, high-yield, emerging market bonds, and municipal bonds, as U.S. Treasuries now look expensive with their low yields. Investors may even consider international and emerging market dividend-paying stocks for their more attractive valuations.
Investors who are interested in the high-yield segment have several options to choose from to diversify a fixed-income portfolio. For instance, DWS has come out with the Xtrackers High Beta High Yield Bond ETF (NYSEArca: HYUP) and Xtrackers Low Beta High Yield Bond ETF (NYSEArca: HYDW) to help investors reduce or increase the risk they are comfortable with in the high-yield segment. HYUP offers investors access to speculative-grade higher beta bonds, while HYDW provides access to lower beta bonds. The two ETFs combined would mirror the portfolio of the broader Xtrackers USD High Yield Corporate Bond ETF (HYLB).
For those more concerned about interest rate risk, the Xtrackers Short Duration High Yield Bond ETF (NYSEArca: SHYL) goes down the yield curve to cover the speculative-grade debt with shorter durations or lower sensitivities to changes in interest rates.
Lastly, the Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF (Cboe: HYIH) is explicitly designed to keep investors engaged with high-yield corporate bonds while mitigating interest rate risk.
Furthermore, something like the Deutsche X-trackers MSCI EAFE High Dividend Yield Hedged Equity ETF (NYSEArca: HDEF) and Xtrackers MSCI All World ex-U.S. High Dividend Yield Equity ETF (NYSEArca: HDAW) can help investors tap into dividend-paying stock opportunities around the world. Blumenthal argued that tactical high-yielding and growing dividend stock ETFs might be suitable alternatives to traditional fixed-income buy-and-hold investments, especially in a recovering market environment with Federal Reserve loose monetary measures to keep rates low for years to come.
Additionally, Xtrackers Municipal Infrastructure Revenue Bond ETF (RVNU) may be another way to diversify a fixed-income portfolio with municipal bond exposure.
Financial advisors who are interested in learning more about high-yield strategies can register for the Wednesday, April 29, webcast here.