With low-risk income hard to come by these days, investment
advisers are relying more on common stocks, preferred stocks and
senior loans for cash flow.
Treasury yields are hobbling along at all-time lows as
investors have flocked to them as a safe haven in the face of the
European debt crisis and uncertainty in the U.S.
The benchmark 10-year Treasury note bond currently yields
1.64%, which would most likely turn into a loss in real terms
considering inflation hovers at about 2%.
We asked some asset managers to share their top ETF pick for
the rest of the year.
Thomas Wilson, managing director at Brinker Capital in
Berwyn, Penn., with $11 billion in assets
SPDR S&P Dividend (
): The events in Europe have clearly created head winds for
equities in the U.S. In addition, while economic data has been
reasonable thus far in 2012, more recent data is depicting a
Equity valuations are reasonable and arguably cheap when
compared to other investment choices. If you are an investment
bull, a leveraged-equity ETF would be a great investment, while
investment bears should consider a leveraged-inverse-equity
For those that are uncertain about the general direction of
the market, an investment in SDY could be appropriate. This ETF
is based on the Dividend Aristocrat index. The equal-weighted
index consists of companies within the S&P 500 index that
have increased their dividend every year at least the last 25
years. These companies have stable businesses and are increasing
their cash flows each year, which allows them to increase their
dividend payout. This ETF yields approximately 3.2%.
Andrew D.W. Hill, president and co-founder of Andrew Hill
Investment Advisors, Naples, Fla., with $31 million in
IShares Preferred Stock Index Fund (
): While the stock market in its seasonal weak period and
investment grade bonds offer yields barely covering projected
inflation, preferred stocks present an opportunity to earn a
reasonable return, with moderate risk.
While preferred stocks are not without risk, they have held up
relatively well this spring, as many of the issuers have
materially improved their financial strength. Preferred stocks
are behind bond holders in the case of bankruptcy; however, the
yields more than compensate for the risk with PFF yielding more
Kim Arthur, president of Main Management in San
Francisco, with $400 million in assets
PowerShares Senior Loan Portfolio (
): BKLN is the world's first and only ETF that seeks investment
results that generally correspond to the price and yield
performance of the S&P/LSTA U.S. Leveraged Loan 100
This is a great diversification and hedge against rising
rates, due to the interest-rate reset every 45 days and the
negative correlation to U.S. Treasury and U.S. Aggregates. These
loans are senior in the capital structure, only subordinated to
the U.S. government claims and generally feature more restrictive
covenants. They are first lien collateralized with accounts
receivables, inventory, plant machinery and equipment. This has
resulted in lower default rates and higher recovery rates than
Currently, the global macro environment is slowing due to
continued global austerity and deleveraging, which is
deflationary, and central bank printing, which is inflationary.
BKLN is a good way to get a 5% yield, while participating in a
pool of loans that are trading at a 5% discount to par, or face
value. By contrast, high yield is trading at a premium to
High yield is yielding 200 basis points above BKLN but has
credit and interest-rate risk. BKLN only has credit risk. In
2008, the senior loan market got hit hard as the first phase of
deleveraging took place, including a lot of leverage in the funds
that bought senior loans that had to be un-wound.
In a further economic slowdown, BKLN will go down, but high
yield will probably go down further due to its subordinated
position in the capital structure and lack of first-lien
collateral. During May 2012, BKLN declined 1.5% vs. the S&P
500's decline of 6%.
Roger J. Schreiner, president and CIO of Schreiner
Capital Management in Exton, Penn., with $75 million in
IShares Barclays 1-3 Year Treasury Bond (
),3-7 Year Treasury Bond (
),7-10 Year Treasury Bond (IEF),20+ Year Treasury Bond
(TLT),iShares Barclays MBS Bond (MBB),iShares iBoxx $ Investment
Grade Corp Bond (LQD),PowerShares Emerging Markets Sovereign Debt
(PCY) andSPDR Dow Jones REIT (RWR):
For now the technicals are mixed, suggesting that we are
entering a "risk-off" environment.
We have very low allocations to equities right. No one knows
what the second half of 2012 will bring, but the probabilities
suggest that the market will muddle through as the global economy
struggles to work through all of the issues at hand.
Our core global macro strategy has its largest positions in
domestic fixed-income funds like SHY, IEI, IEF, TLT, MBB and LQD.
Interest rates may continue to fall as investors everywhere have
shown no willingness to be anything but extremely risk averse.
Capital will continue to flow away from the eurozone as the
crisis there drags on and investors seek relative safety.
We also have positions in PCY and RWR. Both of these sectors
have been trending higher since their bottom in 2009. These
positions provide a degree of noncorrelation and diversification
in our clients' portfolios.