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More money is going into fixed income ETFs this year: Expert

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Tom Lydon, ETF Trends CEO joins Yahoo Finance's Akiko Fujita to break down some high-yield opportunities in ETFs amid the coronavirus pandemic.

Video Transcript

AKIKO FUJITA: Time for our ETF Report, brought to you by Invesco. Today, we are taking a look at high-yield ETFs. Our next guest says investors may find some real opportunities in this space with a dividend rebound. Let's bring in Tom Lydon. He is the CEO of ETF Trends. So Tom, walk me through your argument there on why you think that could be supportive of these high-yield ETFs.

TOM LYDON: Well, we all know in this environment, Akiko, finding yield has been a challenge for sure. And what's interesting is even though it's been a good year for stocks in general, especially domestically, we've seen more money go into fixed income ETFs so far this year, almost $150 billion.

Now, as you're looking for yield, and you also are in a situation where you don't appear to see rising interest rates anytime soon, you can camp out in some high-yield or high dividend yield ETFs and maybe be comfortable there for a while when, as you know, your bank account, your CDs, treasuries, high corporate grade ETFs are not going to pay you that much.

So in some of these high-yield offerings, you can actually get some pretty good returns. At the same time as the government has been buying back into the high-yield marketplace with ETFs, there's been some appreciation along the way as well.

AKIKO FUJITA: Tom, there's certainly going to be concerns about some of the risks associated with high-yield. What are particular ETFs you think investors should be looking at?

TOM LYDON: Yeah, so that's really key and critical because, as we know, some of these high-yield ETFs have indexes that they buy that basically buy the masses. What you want to do is avoid those underperforming companies or those that might be threatened where their dividends may be at risk.

So a couple ETFs, one is the FlexShares High Yield Value-Scored Bond ETFs, HYGV, where there's-- within the process, they actually go through and remove the 10% of the most risky, less liquid stocks that are in the high-yield marketplace. And that's really where most of the risk is. And with this, it's able to give you a yield among those that are a little bit safer of over 6-and-1/2%, which in this day and age is really pretty attractive.

Another one is the ALPS Sector Dividend Dogs ETF, SDOG, kind of a cool ticker. But what they do from a more diversified standpoint is they pick five high dividend yielding stocks among all 10 sectors. And if you get that diversification from an equal weight standpoint, you don't have too much concentration in one area, like energy, for example, that's really been under pressure, under pressure to continue to offer higher yields. And as we know, some of these dividends might be threatened down the road.

AKIKO FUJITA: You mentioned that this is kind of the area to camp out, especially given rates are likely to remain low for a while. We've got the FOMC meeting kicking off today. Certainly, it looks like rates will stay, remain low for a while. Are we likely to see more significant inflows into equities as a result of that? I mean, you just mentioned that there's still a lot of money in fixed income, even with not a significant return on that front.

TOM LYDON: Well, absolutely. However, there's been certain sectors, as you know, that have done quite well in this work-from-home environment. And if you look at FANG stocks that were made for this environment, they've done really, really well. So information technology, health care, those types of stocks have done tremendously well.

And I think, based on the fact that the FOMC is probably going to have a snoozer type of meeting, I don't think we're going to expect a lot of new news out of that. I think some of the conversations around inflation, where we're seeing some areas, like supermarket prices, lumber prices, where it's starting to go up, I think what they're going to find is it's more of a disruption problem as opposed to a price-increasing problem.

And then they're going to talk about real estate. For sure regions outside of major cities, we've seen an increase in real estate prices, but we're probably going to see a corresponding decrease in real estate prices within those cities. So if those don't balance themselves out, Chair Powell is probably in a situation where it's going to be status quo, especially if they don't want to have any type of appearance that they're affected by the current administration at all.

So I think it's going to be more of the same going forward. And if that's the case, when you look at equity markets-- technology, information technology, health care-- those types of companies have really upped their growth trajectory, and we've seen a greater profitability there as well. I think we're going to see more of the same.