Behind the scenes of the latest rebound in stocks, there’s a growing trend for steady income streams as risk-taking heats up and cold this year.
In the $6.6 trillion exchange-traded fund sector, three dividend-focused ETFs rank among the top 10 in terms of equity inflows, according to data compiled by Bloomberg. The leader, the $36.5 billion Schwab US Dividend Equity ETF (ticker SCHD), has posted only five outflows this year.
In the bond market, a mix of dip-buying behavior and growth concerns have sparked a fierce rally in Treasuries after benchmark yields hit a multi-year high last month. Billions are funneled into corporate debt, S&P 500 earnings yield holding thinnest profit to average yield blue chip Bonds in over a decade.
Coupon-clipping and demand for reliable payments shed a cautionary light on the biggest two-day rally on record since the Federal Reserve’s rate decision. whereas irrigated Chair Jerome Powell on Wednesday raised the prospect of smaller rate hikes in the future, warning skeptics that still-high inflation would stall a pivot and send the economy into recession. Against that background, it makes sense to play it safe, according to Max Gokhman of AlphaTree.
Gokhaman, the firm’s chief investment officer, said, “The common denominator is defense. Buying stocks of companies with high-quality corporate debt and flexible balance sheets that can pay consistent dividends without worrying about additional leverage or margin pressure makes sense. Is. .”
While the S&P 500 is up 9% in July, on track for its biggest month-long gain since November 2020, the index is still down 13% this year. Strong earnings have reassured traders lately, but uncertainty around the US recession and the way the Fed will hike rates has kept traders on their toes.
The back-and-forth nature of stocks has made bonds more attractive to some investors. The average yield on investment-grade bonds currently stands at 4.35% while the S&P 500 “pays” about 4.8% in earnings. This is close to the smallest difference since 2010.
“Really where we’re starting to see opportunity is the credit market,” Ros Koestreich, portfolio manager at BlackRock’s Global Allocation Fund, said on Bloomberg television. Over the next few months, one of the things you can do to your portfolio is add carry. You can add income.”
According to Karissa McDonough of Community Bank Trust Services, the relatively high returns on investment-grade bonds mean that unlike in the past decade, investors don’t have to “dive” into quality for meaningful returns. This is an attractive proposition with bearish fears. On high alert.
“In corporate bonds, especially high-quality corporates, we’re seeing returns in excess of 5% in sectors that we haven’t seen in a long time,” McDonough, a fixed income strategist, said on Bloomberg television. Interview. “It’s real money, real income, and a great opportunity as long as you’re selective.”
Similarly, a volatile stock market this year has pushed investors towards ETFs that guarantee some degree of steady income. SCHD, which earned nearly $8.3 billion this year, is on track to surpass a record $9.8 billion by 2021. And more than $6.3 billion has flowed into the $11.5 billion JPMorgan Equity Premium Income ETF (JEPI) year-over-year, while the $46.1 billion Vanguard High Dividend Yield ETF (VYM) has taken in $6 billion in 2022 — a record.
ETF issuers are also trying to capitalize on this trend. The launch and applications for income-oriented funds have multiplied this year, with strategies ranging from buying stocks of dividend-paying companies to selling call options on the S&P 500.
But the hunt for earnings isn’t as easy as chasing the highest-paying stocks, according to Dan Suzuki of Richard Bernstein Advisors, whose firm has been adding high-quality dividend stocks and longer-term bonds in recent weeks.
“High-dividend payers are like high-yield bonds – there is a risk that the dividend gets cut,” said Suzuki, the firm’s deputy chief investment officer. But long-term Treasuries and high-quality dividend stocks are “both an attractive way to get defensive in a portfolio.”
This story has been published without modification in text from a wire agency feed.
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