On Wednesday, the Federal Reserve raised interest rates by 50 basis points and, with inflation showing no signs of slowing in the near term, the US central bank will unveil several more rate hikes over the course of 2022.
The problem with this course of action is that it is causing carnage in the bond market. It is only modest hyperbole to say that the number of fixed income exchange-traded funds in the green this year can be counted with one hand.
To compound the woes of income investors, although bond yields are rising due to falling prices, actual yields are low and far from enough (in most cases) to help investors adequately combat the downturn. persistent inflation.
The good news for income-seeking investors is that hope is not lost as there are a variety of ETFs with rising rate protection and inflation-fighting capabilities. Here are a few to consider.
Global X Nasdaq 100 Covered Call ETF (QYLD)
Growth and technology stocks have been hit hard this year, but that shouldn’t drive investors out of the market. Global X Nasdaq 100 Covered Call ETF (QYLD). In fact, the current market environment is ideal for this income-generating ETF.
QYLD tracks the Cboe Nasdaq-100 BuyWrite V2 Index, meaning it writes or sells covered calls on the widely followed Nasdaq-100 Index (NDX). The increase in broader market volatility at the hands of Fed tightening is a positive for QYLD, as increased volatility leads to higher option premiums and this may facilitate more revenue. Also, QYLD is not a fixed income equivalent. Rather, it is a bond alternative that is not sensitive to rising rates.
“Central bank tightening has not only led to soaring yields and credit implications. Growth stocks began to sell out in favor of value,” according to Global X research. For income investors, covered call strategies on major indices like the Nasdaq 100 or S&P 500 could be a way to generate income outside of traditional dividend-paying stocks and fixed-income securities.
WisdomTree US High Dividend ETF (DHS)
Talk about an idea for shelter from the storm. the WisdomTree US High Dividend ETF (DHS) is up almost 6% since the start of the year while the S&P 500 is down almost 13%.
That alone is impressive, but the DHS results in 2022 are more impressive when you consider that high-dividend stocks generally decline as interest rates rise. In other words, the DHS, which returns 3.57%, in 2022 is a case of history that does not always repeat itself or even rhyme for that matter. Additionally, this rising rate ETF offers valuable protection against stagflation through clever sector weightings.
“According to Bank of America research, the best performing sectors during stagflation have always been Utilities, Energy and Basics. The worst were Consumer Discretionary, Information Technology and Services. communications,” notes WisdomTree analyst Matt Wagner. “Year-to-date performance so far has favored stagflation havens. Energy (+34%), Utilities (+3%) and Materials (+3%) were the best performing sectors, while Consumer Discretionary (-18%), Technology information (-20%) and communication services (-24%) were the worst.
Algerian MLP ETF (AMLP)
Up 21% since the start of the year, the Algerian MLP ETF (AMLP) is another example of a high-dividend ETF defying the conventional wisdom of rising rates.
Indeed, AMLP is graduating from energy status as the best performing domestic sector this year. Still, a 7.45% dividend yield is hard to ignore, and it’s easy for investors to ditch sagging bond funds for this ETF. Additionally, as Stacey Morris, CFA, Director of Research at Alerian points out, pipeline operators play an important role in the transition to clean energy.
“Even as the world moves towards decarbonization, recent geopolitical events and corresponding oil and natural gas price spikes have highlighted just how dependent our global economy is on these fuels,” Morris wrote. “Oil and natural gas will likely play a large role in the energy mix for decades, but steps can be taken to produce and consume oil and natural gas with fewer emissions.”
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