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Bond yields remain high, meaning prices have fallen and that’s notable for numerous reasons. Not the least of which is long-term history confirming that the higher an investor’s initial yield is when entering the bond market, the more the investor’s odds of success are enhanced.
The 30-day SEC yield on the IDC US Treasury 20+ Year Index is 3.95%, which is saying something when considering it’s comprised exclusively of U.S. government debt. On the other hand, there’s much consternation about what’s next fixed income because there’s uncertainty about the Federal Reserve’s plans for interest rates in the second half of 2023.
As advisors know, there are plenty of other income ideas to consider – many of which are growing in credibility and utility today. Data confirm advisors are in fact evaluating various income-generating asset classes.
“In an unpredictable macroeconomic and market environment, advisors are shifting their focus toward income generating strategies,” according to Nasdaq. “Nasdaq recently surveyed over 450 financial advisors to better understand how their investment decisions are adapting to the changing market environment. Nearly half of all respondents (48%) said that their average income allocation increased this year, compared to last year.”
Income Matters More and More
Dividends remain central to the income thesis, having accounted for a significant percentage of investors’ equity returns over long holding periods.
Over that period, dividends account for 20% of the S&P 500 total returns – just half the average seen from 1930 through 2021. However, that doesn’t diminish the importance of dividends. If anything, those statistics cement the importance of quality dividends and not simply focusing on big yields. Intel’s (NASDAQ: INTC) recent payout cut is a reminder of the risks of investing based on yield. However, advisors are taking increasingly unique approaches to income.
“One key finding the survey revealed is that financial advisors are using income generating strategies in multiple asset classes and investment vehicles to achieve a total return, not just to generate a paycheck,” adds Nasdaq.
Forty-nine percent of those surveyed by the exchange operator say they use income-generating assets in client portfolios to improve total returns while half say they deploy such assets for ballast or as paycheck substitutes.
Unique Options Increasingly Accessible
For decades, the prosaic options for income were bonds and dividend stocks. Fortunately, exchange traded funds are broadening the playing field, making fresher, potentially more rewarding strategies available to all clients.
“As interest continues to grow in the income space, advisors have more options to invest in income generating strategies than ever before,” observes Nasdaq. “In wading through the possibilities, advisors and investors alike should carefully consider the product’s methodology to ensure it’s designed with their desired outcome in mind. If you’re interested in integrating income into your portfolio, now may be the time to consider one of these investment vehicles.”
Options strategies in ETF form are a fine example of the aforementioned trend. Not only do these funds provide above-average levels of income with some downside protection to boot. All that with less interest rate risk than bonds.
“Finally, investors may want to add a ballast to their portfolio, specifically seeking to mitigate downside risk – without sacrificing upside potential. The Global X Nasdaq-100 Covered Call ETF (QYLD) tracks the CBOE Nasdaq-100 BuyWrite V2™ Index (BXNT™). The strategy holds Nasdaq-100 Index® stocks and writes (sells) options simultaneously,” concludes Nasdaq.