With 2020 only a few weeks away, now is the time for investors to take a close look at their portfolios to analyze if they contain the right strategies to enhance yield potential.
On the recent webcast, 2020 Income Investing Outlook: What Advisors Need to Know, Fran Rodilosso, VanEck Head of Fixed Income ETF Portfolio Management, and Brandon Rakszawski, VanEck Director, ETF Product Development, looked to where the markets are heading in 2020 and potential areas of opportunity for a low-interest environment.
“VanEck’s baseline view is that we don’t think it’s all about the Fed or global central banks, but on the other hand, continuing accommodating policies while the growth outlook may be improving at least slightly, that adds up to potential opportunity to take more risk in portfolios in terms of fixed income, credit and also on the equities side,” Rodilosso said.
For example, if fixed-income investors want to put their cash to work but are not ready to commit to long-term risks, many are considering a floating rate bond ETF, such as the VanEck Vectors Investment Grade Floating Rate (NYSEArca: FLTR) to act an alternative to traditional cash instruments.
Rodilosso said FLTR has an emphasis on notes that are more between 2 and 5 years to final maturity, which gives them a higher spread over LIBOR than a lot of the market that exists inside of two years to maturity.
“It’s an investment-grade nearly zero interest rate duration approach that yields in the mid 2s right now – so pick up over fixed rate bond options,” he said.
As a result of the safe and conservative nature of floating rate bonds, investors should not expect high yields. Nevertheless, Treasury money market funds are so starved for yield that anything with an extra basis point or two and the quality and liquidity of a Treasury security will provide an attractive alternative.
Additionally, investors looking for a high-yield, equity income position may consider Business Development Company, or BDC, exposure to complement a traditional income-oriented portfolio. BDCs are comprised of companies that fund small- to mid-sized private companies, which are usually rated below investment grade or not rated at all. Furthermore, these companies should also do relatively well in the kind of environment ahead where many expect an increase in interest rates since most BDC loans set to float with interest rate benchmarks.
For example, the VanEck Vectors BDC Income ETF (NYSEArca: BIZD) offers a pure play to BDCs. According to VanEck, 80% of the portfolio is allocated to floating rate loans, there is limited rate risk. The ETF also comes with an attractive 9.19% 30-day SEC yield.
For investors seeking value in credit, the Fallen Angel High Yield Bond ETF (ANGL) can be used for higher quality high yield bonds with an embedded value proposition while the Preferred Securities ex-Financials ETF (PFXF) is an option for high income and capital appreciation potential.
To diversify away from the U.S. and benefit from emerging markets growth, consider the Emerging Markets High Yield Bond ETF (HYEM) to diversify a global high yield bond allocation while the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC) is an attractive play for attractive yield potential and currency exposure.
Finally, for dividends with a focus on quality and valuations, the Morningstar Durable Dividend ETF (DURA) is a play for sustainable and attractive dividend yields at attractive prices.
Financial advisors who are interested in learning more about attractive income strategies can watch the webcast on-demand here.