One of the biggest issues confounding advisors this year is how to effectively source income for clients while effectively managing.
That task is as difficult as it’s ever been because, thanks to the Federal Reserve raising interest rates, bonds and equities are falling in unison. Sure, dividend stocks are performing less poorly than the broader market and some corners of the bond market are either perking up or offering unusually tempting yields, the current climate has the potential to reward client portfolios that feature exposure to alternative income-generating assets.
“Alternative” shouldn’t be conflated with “exotic” or “risky.” In fact, many alternative income strategies are familiar, even prosaic. They’re simply overlooked. Now is an appropriate time to change that and advisors can effectively accomplish that objective with exchange traded funds.
ETFs offer tax benefits, liquidity, reasonable fees and other benefits. Plus, there are myriad off-the-beaten path income-generating ideas in the world of ETFs. Here are some to consider.
Inflation Protection, Volatility Reduction and More
There’s no denying the dollar is strong this year, but that could change in 2023 while inflation may not materially ease. In other words, modest allocations to commodities could still be appropriate for plenty of clients. Enter the First Trust Indxx Global Natural Resources Income ETF (FTRI).
“FTRI is a global portfolio of the 50 highest dividend yielding companies involved in five upstream natural resource categories–energy, materials, agriculture, water, and timber. On a quarterly basis, the underlying index is rebalanced so that no single category accounts for more than 30% of the index. To avoid high-yielding stocks that may be unable to sustain their dividends, FTRI includes screens for positive earnings-per-share (EPS), two consecutive years of dividends, and rising dividend payments,” according to First Trust research.
Translation: FTRI is an equity-based play on commodities. Another idea for advisors to mull is a multi-asset exposure. Various funds are available to this effect, meaning they provide exposure to multiple asset classes under the umbrella of a single ETF. The Multi-Asset Diversified Income Index Fund (MDIV), which yields 7.85%, is an example of a multi-asset ETF.
“By diversifying across five different asset classes, MDIV seeks to reduce price volatility and achieve a more stable yield, particularly during equity market drawdowns. Since MDIV’s inception, the S&P 500 Index has experienced six corrections (declines of greater than 10%). On average, MDIV outperformed the S&P 500 Index by 2.5% during these drawdowns,” adds First Trust.
Get It Right with Buy-Write Strategies
One of the more unique though unheralded alternative income strategies is options selling in fund form. While many clients aren’t likely well versed in this strategy, it’s relevant today because offers above-average income and protection against rising rates.
There’s an ETF for that. Actually, there are quite a few. The First Trust BuyWrite Income ETF (FTHI) is part of that group.
“FTHI is an actively-managed equity ETF that generates income by writing S&P 500 Index call options. The notional value of these options may range between 25% and 75% of the overall fund. Stocks are selected to favor dividend-payers, and the portfolio can generally be expected to provide broad equity market exposure across sectors,” concludes the issuer. “While on one hand, call premiums may limit upside participation in bull markets, on the other hand, they may improve total returns in sideways or declining markets. Additionally, because options premiums generally increase during periods of heightened volatility, FTHI may be able to generate more income during “risk-off” periods. Lastly, by relying on call premiums to boost income, FTHI may avoid making concentrated bets in higher dividend yielding sectors, such as utilities or financials.”