Bring On The Yield


As long as the Federal Reserve and Ben Bernanke continue to destroy the value of the U.S. dollar and keep interest rates abysmally low, finding yield in traditional fixed-income instruments will remain challenging to say the least.

In search of other ways to find yield, investors have not just resorted to allocating capital to equities, but at chasing corporate bonds, dividend yielding stocks and exchange-traded funds that cast a wide net over the fixed-income space.

Fixed-income ETFs are becoming the rage with investors who want the liquidity of an ETF combined with bond exposure according to Alec Young, analyst at S&P Capital IQ.

“The advantages of using a fixed income ETF such as the iShares Barclays Aggregate Fund is that you can earn a 2.8% yield, with its costing a minimal 0.22% gross expense ratio and you can benefit from diversification to Treasuries, Agencies, and Corporate bonds,” Young told Markets Media. “However, by passively tracking a broad index, you could have too much exposure to one area of the market that performs well or another than if you made individual bond selections to focus on investment-grade corporates over Treasuries or the inverse.”

The thing is, despite promises from the Federal Reserve to keep interest rates low throughout the rest of the year and into 2013, not everyone feels comfortable dealing with bonds, be it corporate or government debt. That has led to massive inflows into ETFs of sub-investment grade debt and related indices.

Others who prefer to avoid fixed-income entirely are going after dividend plays. Standards like blue chips and REITs are seeing a large run up since the beginning of the year, as are dividend-focused ETFs.

“We have found that investors are increasingly looking at equity ETFs that offer an above-average dividend yield, but we encourage investors to not just choose the ETF with the highest yield since the stocks that they hold may not have favorable risk profiles,” said Young. “Two examples of a large ETFs that pay an above-average yield and owns stocks that S&P Capital IQ views favorably from a risk perspective is iShares Dow Jones Select Dividend Index ETF (DVY 56 Overweight) that yields 3.3% and costs 0.40% and SPDR S&P Dividend (SDY 57 Overweight) that yields 3.1% and costs 0.35%”

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