On Wednesday, the Federal Reserve boosted interest rates by 50 basis points and with inflation showing no signs of easing over the near-term, the U.S. central bank will be unveiling several more rate hikes over the course of 2022.
Problem with that course of action is that it’s causing carnage in the bond market. It’s only modest hyperbole to say the number of fixed income exchange-traded funds in the green this year can be counted on one hand.
Compounding income investors’ woes is the point that although bond yields are rising by way of falling prices, real yields are low and not nearly enough (in most cases) to help investors adequately combat persistent inflation.
The good news for investors yearning for income 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 are badly battered this year, but that shouldn’t chase investors from the 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). Rising broader market volatility at the hands of Fed tightening is a positive regarding QYLD because increasing volatility leads to higher options premiums and that can facilitate more income. Additionally, QYLD isn’t a fixed income equivalent. Rather, it’s a bond alternative and one that isn’t sensitive to rising rates.
“Central bank tightening did not just lead to a spike in yields and credit implications. Increased volatility began flowing into the equity markets as investors began re-pricing valuation multiples and growth equities began selling off in favor of value,” according to Global X research. “Volatility increases were notable across major indices, after the equity market selloff earlier in Q1. 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.”
WisdomTree U.S. High Dividend ETF (DHS)
Talk about a shelter-from-the-storm idea. The WisdomTree U.S. High Dividend ETF (DHS) is up nearly 6% year-to-date while the S&P 500 is lower by nearly 13%.
Alone, that’s impressive, but DHS’s 2022 showing is more impressive when considering high dividend stocks usually decline as interest rates rise. In other words, DHS, which yields 3.57%, in 2022 is a case of history not always repeating or even rhyming for that matter. Additionally, this rising rates ETF offers valuable stagflation protection by way of astute sector weights.
“According to Bank of America research, the best-performing sectors during stagflation have historically been Utilities, Energy and Staples. The worst have been Consumer Discretionary, Information Technology and Communication Services,” notes WisdomTree analyst Matt Wagner. “Year-to-date performance has thus far favored the stagflation havens. Energy (+34%), Utilities (+3%) and Staples (+3%) have been the best performing sectors, while Consumer Discretionary (-18%), Information Technology (-20%) and Communication Services (-24%) have been the worst.”
Alerian MLP ETF (AMLP)
Up 21% year-to-date, the Alerian MLP ETF (AMLP) is another example of a high-dividend ETF defying conventional rising rates wisdom.
Indeed, AMLP is getting a lift from energy’s status as the best-performing domestic sector this year. Still, a dividend yield of 7.45% is hard to ignore and it makes easy for investors to ditch sagging bond funds for this ETF. Plus, as Stacey Morris, CFA, director of research at Alerian, points out, pipeline operators are playing important roles in the clean energy transition.
“Even as the world moves towards decarbonization, recent geopolitical events and corresponding price spikes in oil and natural gas have highlighted how much our global economy is still dependent on these fuels,” Morris wrote. “Oil and natural gas will likely play an important role in the energy mix for decades, but steps can be taken to produce and consume oil and natural gas with fewer emissions.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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