The volatile end to Q3 and flow of soft economic data in the U.S. since then has once again highlighted the importance of income-focused investing. Be it bonds, high dividend equities, or pass-through securities, picks that address higher yielding securities are performing well in the final quarter of year.
The Fed lift-off worry which has been a pain in the neck for stocks so far this year has now shifted back to the early 2016, at the earliest. Back-to-back shockers at home including a soft job report, muted manufacturing numbers, subdued inflation and now an eight-month low retail sales in September on top of a revised down sales figure in August marred the optimism surrounding the U.S. growth momentum.
To top it all, global growth worries stemming from hard landing fears in China, return of deflationary threats in the Euro zone, a slowdown in Japan and a faltering emerging market that was hit by the commodity market crash persuaded the Fed to stay put. Investors should note that not only the Fed, a half of the globe, specially the developed part is presently pursuing an easy money policy.
While it is a decent setting for capital gains, 10-Year Treasury bond yields slumped and are at 1.99% as of October 14, 2015 leading some to believe that a glorious phase for high yielding securities may be near.
While the likelihood of more cheap money inflows should cheer up stocks and especially dividend investing all over again, the momentum lost in the U.S. economy also raises questions over how long the Fed-induced optimism can support a stock market rally. So, high-yield dividend investing is needed to ward off capital losses, if there is any in the near future.
Moreover, investors can target bond ETFs as income picks. This is truer given the flight to safety amid heightened volatility in the global market. Broader commodities are also helping this trend, with stubbornly-low oil prices putting a cap over inflation.
In this type of an environment, investors can count on income picks for Q4. While an individual security pick is always an option, ETFs give options to fairly diversify one’s portfolio. Below, we highlight four intriguing selections which could be just what the doctor prescribed. These options offer up a nice combination of potential capital appreciation and strong yields. In fact, most of the choices have yields in excess of 5%, making them excellent income choices:
Global X Super Dividend (SDIV)
SDIV represents a compelling product to invest in international markets for high yield. SDIV is an equally weighted basket of 114 high yield stocks from around the world. With 30% exposure in U.S. equities, the fund also provides access to securities in Europe, Australia, Asia, Canada and Latin America.
Among sector allocations, real estate, financial services, utilities and telecommunication remain the top four choices for the fund. The fund charges a fee of 58 basis points annually. Furthermore, not only is the product well-mixed from a sector look, it is also well-diversified from an individual holding perspective as no single firm makes up more than 1.89% of assets (read: Earn a 6% Yield with These 3 International ETFs)
The fund yields about 6.91% annually, representing a good opportunity for investors to generate some income by investing overseas. This Zacks ETF Rank #3 (Hold) was up 2.4% in the last one month (as of October 14, 2015).
Arrow Dow Jones Global Yield ETF (GYLD)
For investors who want exposure to a variety of high yielding market areas, ArrowShares’ GYLD could be an excellent choice. This fund tracks the Dow Jones Global Composite Yield Index, giving access to five key market areas; global equities, global real estate, global sovereign debt, global alternatives and global corporate debt (read 4 Excellent Dividend ETFs for Income and Stability).
The fund puts more-or-less 20% in each of the five sectors with no single security taking more than 0.99% in the fund. This ensures that the product is well diversified among 150 total holdings. The fund pays a 12-month Yield of 8.71% (as of October 14, 2015). Over the last one month, the fund was up over 2.2%. The fund’s multi-asset approach and a global footprint should offer decent capital appreciation going forward (read: Protect Your Portfolio with These Multi-Asset Income ETFs).
High Yield Long/Short ETF (HYLS)
The fund seeks to provide current income by investing primarily in a diversified portfolio of below investment-grade or unrated high-yield debt securities. Capital appreciation is its secondary motive as evident from the 1.8% loss incurred in the last one month.
The 296-holding product thrives on long-short strategies and can be effective in times of market upheaval. Net weighted average effective duration (considering the short positions) is 3.07 years indicating low interest rate risks. The fund is meant for an intermediate term as evident from 6.08 years of weighted average maturity. It yields 6.68% annually.
Vanguard Extended Duration Treasury ETF (EDV)
For a long-term play on the bond market, investors have EDV, a fund that seeks to match the performance of the Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. This means that this benchmark zeroes in on fixed income securities that are sold at a discount to face value, and then the investor is paid the face value upon maturity. This is a safer choice with decent current income opportunities.
The fund has been a great performer lately, having returned over 5.8% (as of October 14, 2015) on its safe haven appeal. This particular 73 bond basket has an average maturity of 25.1 years, and a yield to maturity of 3%. The fund may yield lesser than other options, but it is still higher than the benchmark yield and is also likely to shower smart gains on investors in the present market condition.
The effective duration of the ETF is 24.7 years suggesting high interest rate risks. This Zacks Rank #2 (Buy) ETF has amassed about $371 million in assets. It charges just 12 basis points a year (read: Expect Volatility in Q4? Try These ETF Ideas).
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