In a persistently low yield environment, income-minded investors have to be a little more creative. Those who still want an alternative way to generate some extra cash in a challenging market environment may turn to targeted exchange traded fund strategies. On the recent webcast (available On Demand for CE Credit), Innovative Income Strategies for Today’s Challenging Environment , Chuck Martin, Managing Director and Portfolio Manager at QuantShares, illustrated the current low-yield environment, pointing out that interest rates would have to increase nearly 325% to hit the historical average of 5.33% going back to 1971.
Meanwhile, investors will have to account for rising inflationary pressures in an expanding economy as the Trump administration looks to implement deregulation and tax reforms, along with a low unemployment rate that could lead to rising wages.
However, volatility is also an issue as factors like declining CPI, North Korea tensions and an aging baby boomer generation could all contribute to slower growth and lower inflation. "The current low-yield environment coupled with heightened equity market volatility presents income-seeking investors with unprecedented challenges," Martin said. "Valuations of many dividend equities are above historical norms due to strong returns and asset flows, while many investors are avoiding additional fixed income exposure in the face of rising interest rate investment." Alternatively, Martin pointed to the QuantShares Hedged Dividend Income ETF (DIVA) , which is designed to deliver to investors a strong current yield capital appreciation potential with a risk profile similar to a corporate bond index, as an alternative way for dividend investors to generate yield. Martin explained that DIVA looks for stable or growing dividends and looks for highest yield among the 1,000 largest names in the U.S. The portfolio then limits sector weights and equally weights components to avoid concentration risks. Furthermore, the ETF shorts stocks with low yields to hedge equity and sector risks as a way to diminish overall portfolio volatility and preserve the dividend yield of long securities. "We believe it has the potential to provide significantly lower levels of interest rate and credit risk versus a corporate bond fund," Martin said. DIVA is an "effective alternative to buying high-yield fixed income funds to potentially increase overall portfolio yield and reducing correlation. [DIVA] allows the potential for higher yields of dividend stocks while protecting against the characteristic volatility of equity markets." Related: Rethinking Bond ETFs: Unbundle and Rebuild Due to its customized 100/50 long/short equity strategy, the overall risk is approximately half of the S&P High Yield Dividend Aristocrats Index, providing investors a risk profile closer to an investment-grade corporate bond index. Furthermore, investors who are wary of further market drawdowns may look to a hedged equity strategy, such as the QuantShares U.S. Market Neutral Anti-Beta Fund (BTAL) . "Our research has shown that allocating a strategic position to BTAL is the best way to insulate your portfolio from unexpected market events," Martin said. BTAL provides investors with the means to capitalize on the spread return between low- and high-beta stocks within the S&P Dow Jones U.S. Index. When the market sells of and volatility rises, high-beta stocks tend to sell off more than low-beta stocks. On the other hand, during market recoveries, volatility diminishes and high-beta names outperform low-beta stocks. Financial advisors who are interested in learning more about alternative income strategies can watch the webcast here on demand.Read more on ETFtrends.com