The market environment has been very challenging for the
income investors. Traditional income assets currently produce
miniscule yields and some even fail to deliver above-inflation
returns. Search for higher yields sometimes lures investors
to risky assets.
Bonds had a terrible performance last year as investors
ultimately realized that the three decade bull-market may be
nearing its end. The situation changed earlier this year as
many investors sought cover in "safety" of bonds due to emerging
markets turmoil and concerns about the economic recovery. (Read:
Best ETF Strategies for 2014
However, the Fed will likely remain on taper track if the economy
and the labor market continue to improve. Thus rates may begin to
drift higher soon, resulting in losses for bond investors.
High-yielding junk bonds in particular look very risky as of now.
Most high-yield stocks are from defensive sectors, which tend to
underperform in a rising rate environment. (Read:
3 Energy ETFs to buy on Ukraine crisis
High dividend yielding stocks can often indicate low future
growth potential. Particularly if high dividend yield is a result
of falling stock price, the stock may be risky and dividend may
However, there are some unconventional asset classes and products
that currently have high yield and a solid return potential.
Private Equity ETF
-A Great way to p
rofit from PE Market's Strong Momentum
Private equity firms had a blockbuster year in 2013. Strong
sentiment last year resulted in record fund flow with firms
raising buyout funds totaling $143.5 billion last year, the
highest level since 2008.
Outlook for this asset class remains positive, with improving
global economy. Further, M&A and IPO activities remain
If the stock market continues its uptrend and interest rates do
not rise sharply, then the private equity market can maintain its
positive momentum. Per
, Tiger 21-a group of super-rich individuals (median net worth
$75 million) sees private equity as the best opportunity in 2014.
Private equity also has a low correlation to the broader market
and provides portfolio diversification.
While many investors are unfamiliar with this corner of the
financial market, it is definitely worth a look due to its
superior performance, positive outlook and low correlation with
the stock market. (Read:
Revenue Weighted ETFs keep crushing the
Private equity space is generally accessible only to super-rich
and institutional investors but retail investors can access this
space via an ETF.
PowerShares Global Listed Private
tracks the Red Rocks Global Listed Private Equity Index. The
index is comprised of securities, ADRs and GDRs of 40 to 75
private equity companies.
Currently the fund has 64 holdings with U.S. PE firms accounting
for about 40% of holdings, followed by UK and France at 18% and
Expense ratio of 2.19% is certainly high but the product sports
an excellent yield of 13.2% currently. The ETF returned 37.1% in
2013 and is up about 6.5% in the last 3 months.
Investors should however remember that this asset class may
perform worse than the broader market during periods of prolonged
During the financial crisis, private equity space and this
product had a terrible performance. So, this investment will need
to be monitored carefully.
Covered Call ETN--
A Safer Way of investing in and extracting income from
Many investors avoid holding gold in their portfolios since it
does not generate any yield. I believe that investors should have
a small exposure to gold as the shining metal has low
correlations to stocks, in addition to being a safe have asset
and an inflation hedge.
After an ugly performance last year, gold has rebounded strongly
this year-up more than 12%. However a rising US dollar and
low inflation may keep the gains in check. That said, long-term
outlook for precious metals doesn't look bad given rising middle
class wealth in China and India.
Credit Suisse Gold Shares
Covered Call ETN (
is interesting and safer way to play the precious metals, while
receiving an excellent income flow. (Read:
Gold ETFs meet covered calls in GLDI)
This ETN tracks the Credit Suisse NASDAQ Gold FLOWS 103 Index.
It uses a covered call investment strategy on a notional
investment in the
SPDR Gold Trust ETF (
SPDR-GOLD TRUST (GLD): ETF Research Reports
GOLD-SH CVD CAL (GLDI): ETF Research Reports
RENAIS-IPO ETF (IPO): ETF Research Reports
PWRSH-GLBL LIST (PSP): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
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Basically, the product invests in GLD and sells out of the money
call options on the position on a monthly basis, to add income to
the position. So if
slide, this product will provide protection to the investors.
But upside potential for the notes is rather limited (beyond 3%
monthly move) due to covered calls; but I don't expect a huge
surge in gold this year.
The product has an expense ratio of 65 bps and yields 11% as of
now. Investors also need to note that trading volumes for
the product are low resulting in high trading costs.
The note outperformed the precious metal by 3 bps last year-not
great but not bad at all considering the huge yield of the
product compared to zero yield by the metal. The product has
returned more than 9% this year.
The Bottom Line
Products with fat yields in general have a poor outlook in the
current environment. But these unconventional ETFs not only pay
out double-digit yield but they have also been beating the market
of late and may continue to do so in the coming months.
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