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7 Ways to Increase Returns With Low Interest Rates

Boost returns despite lower interest rates.

The Federal Reserve lowered the federal fund rate by a quarter of a percentage point this summer, affecting interest rates, and market watchers anticipate an additional drop in the Fed rate. When thinking about the effect of low interest rates have on investments, the impacts are mixed. Fixed income investors dislike low interest rates because bond, certificate of deposit and savings account returns are low leading to diminished cash flow. But businesses and the stock market prefer low interest rates. With lower borrowing costs, companies can grow and expand more quickly leading to greater profits. Savvy investors understand that a diversified investment portfolio is important and includes both stock and fixed investments. To counteract the effect of low interest rates, that depress returns on fixed assets. Here are a few ways to increase your returns.

Change your bank for higher returns.

Many investors ignore cash returns in their low yielding bank savings account, with interest rates of less than 1%. "Consider instead an online savings account where yields can be found in the 2.5% neighborhood, with the protection of federal deposit insurance and the ability to access the money as needed," says Greg McBride, chief financial analyst at Bankrate.com. By simply searching for higher yielding savings accounts, investors can easily increase cash account returns. Currently, online banks offer returns above 2% with FDIC insurance up to $250,000 per depositor at an individual bank. While these returns aren't immune from declines, bank savings account rates tend to hold up better than those of money market mutual funds.

Preferred securities offer the best of both stock and bond returns.

Preferred securities are hybrid investments that have fixed par values, which means the face value, and make scheduled coupon payments, like bonds. They also carry credit ratings and have long or no maturity dates and might be callable or eligible for redemption by the issuer at a certain date. Preferred stockholders have a higher claim on dividends than the common stockholders. That explains the name preferred, and a lower claim than the companies' bondholders. Similar to stocks, preferred shares aren't required to repay the principal. But preferred securities come with two key risks: interest rate risk and credit risk. Because of those risks, preferred securities offer higher relative yields than similar corporate bonds, says Scott Krase, president at CrossPoint Wealth. One fund to consider: iShares Preferred and Income Securities ETF (ticker: PFF), which currently yields 5.6%.

Invest in real estate for higher yields.

When reaching for yield, beware of taking on too much risk, says Mark R. Painter, president at EverGuide Financial Group in New Jersey. He suggests yield seeking investors look to real estate investments. Owning real estate for lease is a way to diversify and create long term cash flow and capital appreciation, for investors with cash for a down payment. For others, real estate investment trusts, known as REITs, or crowdfunded real estate sites offer higher returns for smaller investors. For broad-based real estate exposure, the Vanguard Real Estate Index Fund (VNQ) owns a wide range of real estate and currently yields 3.41%. New real estate crowdfunding platforms such as Diversyfund, Fundrise and Groundfloor are expanding rapidly and offer more direct real estate investments.

CDs increase cash yields.

Don't forget about bank CDs. These investments are FDIC insured and are issued with terms from six months to approximately five years. Many online and brick and mortar banks offer promotions to secure new customers and can be a safer path to higher yields than stock dividends. While savers might worry about early withdrawal penalties, these are minimal. If a saver redeems the CD before maturity, the sacrifice is typically no more than three to six months interest, a small price to pay for the higher yield.

Seek out high income ETFs.

A search for high income exchange traded funds uncovers scores of funds with various holdings and investment strategies, offering dividend yields from 6% up to double digits. But higher yield funds have more risk and a greater chance of losses. The iShares International Select Dividend ETF (IDV) currently yields 6.% with a year to date return of 5.8%. The fund is comprised of high dividend paying stocks. Charles Self, chief investment officer at iSectors, recommends the Invesco S&P High Income Infrastructure ETF (GHII) fund which is less dependent on a strong economy. The fund tracks the S&P High Income Infrastructure Index, and currently yields 5.1%; GHII returned about 12% year to dater.

Discover undervalued high yield securities.

Chasing yield can result in lower long term returns and greater risk. A global perspective and the strong dollar may bode well for emerging-market government bonds. Steven Jon Kaplan, CEO at True Contrarian Investments in New York, suggests investors look at undervalued bonds from countries such as Brazil, Colombia, Malaysia, Russia, China, India and Bangladesh. Most of these countries have never defaulted on their government guaranteed bonds, Kaplan says. He recommends two ETFs. WisdomTree Emerging Markets Local Debt Fund (ELD) currently yields 5.1% and has returned 6% year to date. The iShares J.P. Morgan EM Local Currency Bond ETF (LEMB) yields 3.1% and has returned 2.3% this year. If the dollar falls in value against international currencies, these funds will offer capital gains on top of the dividend payments.

Buck the crowd with emerging market ETFs.

Recently, emerging market stocks have underperformed compared to developed markets. While U.S. stocks are trading at expensive valuations, these out of favor firms are selling at bargain prices. No one knows how long these shunned shares will remain unpopular, but it's likely that at some point, they will revert to their mean returns providing patient investors with both capital appreciation and dividend income. The iShares Core MSCI Emerging Markets ETF (IEMG) offers a 2.66% yield and low 0.14% expense ratio, which means $14 in fees for every $10,000 invested annually. The low beta versus the S&P 500 suggests lower volatility than the U.S. market. Hinting at future price appreciation is the price-earnings ratio of 11.9. That's in contrast with the current Shiller P/E ratio of 29.1, quite a premium from the mean Shiller P/E of 16.

Ways to boost returns with low interest rates:

-- Change your bank for higher returns.

-- Preferred securities offer the best of both stock and bond returns.

-- Invest in real estate for higher yields.

-- CDs increase cash yields.

-- Seek out high income ETFs.

-- Discover undervalued high yield securities.

-- Buck the crowd with emerging market ETFs.

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