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ETF Options to Capitalize on a Yield-Starved Europe


With European central banks enacting loose monetary policies and forcing down rates into negative territory, investors may turn to riskier assets, supporting Europe-related dividend and bond exchange traded funds.

For example, dividend investors can turn to the First Trust STOXX European Select Dividend Index Fund (FDD) to capture large dividend-paying European companies and the WisdomTree Europe SmallCap Dividend Fund (DFE) for small-cap Europe dividend stock exposure. FDD has a 4.23% 12-month yield and DFE has a 2.94% 12-month yield. [Why Invest in Dividend ETFs]

With the WisdomTree Euro Debt Fund (EU) set to close, fixed-income investors will have to turn to broad international bond ETFs for European exposure. For instance, the SPDR Barclays International Treasury Bond ETF (BWX) , which has a 0.64% 30-day SEC yield, includes U.K. 7.9%, Italy 6.6%, France 6.5%, Germany 5.2%, Spain 4.6% and Netherlands 4.6%, among others. [Euro Debt ETF to Close]

Additionally, investors can track more high-yield bonds out of Europe through broad international bond ETFs as well. The United Kingdom, France, Germany and Italy are among the top country tilts in the Market Vectors International High Yield Bond ETF (IHY) , iShares Global ex USD High Yield Corporate Bond ETF (HYXU) and SPDR Barclays International High Yield Bond ETF (IJNK) . IHY has a 6.31% 30-day SEC yield, HYXU has a 3.85% 30-day SEC yield and IJNK has a 4.8% 30-day SEC yield.

In contrast, due to the loose monetary policies across Europe, safer bonds have turned negative, reports James Mackintosh for Financial Times.

Keeping yields in the negative territory, companies like banks, insurance companies and even pension funds are required to hold the assets, no matter the cost. Some institutional investors are also buying for short-term allocations, anticipating yields to drop further into negative territory and prices to rise ahead.

Alternatively, the low-yield environment could fuel a rush to more attractive income-generating assets.

“If you can buy equities or any type of bond you’re going to go there instead,” Jan Loeys, head of global asset allocation at JPMorgan, said in the article. “Each market will get swamped with money simply because you have positive yields — nothing to do with fundamentals.”

However, potential dividend stock investors should be aware that a prolonged deflationary environment could pose a serious problem as consumers hold off spending and industries see slower growth. On the other hand, low inflation would make fixed-income assets more attractive as bonds provide higher real yields.

For more information on dividend stocks, visit our dividend ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.