Consider These ETFs for Alternative Income

Much like 2021, 2022 is turning out to be unpleasant for fixed income investors. With as many as six more rate hikes by the Federal Reserve looming, things in the bond market could worsen before they get better.

Some widely followed fixed income gauges are reflecting as much. Take the case of the Bloomberg U.S. Aggregate Bond Index. It’s down almost 6% year-to-date and for that trouble, investors earn a 30-day SEC yield of just 2.36%.

Of course, investors can turn to dividend stocks and the related exchange traded funds for equity income. That’s not a bad idea given rosy expectations for dividend growth this year, but the S&P 500 yields just 1.30% and it’s coming off its worst quarter in two years.

Said another way, the climate is right for yield-hungry investors to consider some unique income-generating assets. On a related note, here are some alternative income ETFs to consider.

Invesco Global Listed Private Equity ETF (PSP)

Getting the bad news out of the way first, the Invesco Global Listed Private Equity ETF (PSP) is off  16.62% year-to-date. A dividend yield of almost 6% can’t soften that blow. On the other hand, the weak start to 2022 for PSP belies opportunity with this alternative income ETF.

“Another reason behind the growing interest in private equity: Companies are remaining private longer. The number of publicly traded companies in the United States has significantly declined over the past couple of decades,” writes Morningstar analyst Amy Arnott. “At the same time, the private market is home to about 1,000 unicorns–companies valued at $1 billion or more that are available only to select investors through private channels.”

PSP, which tracks the Red Rocks Global Listed Private Equity Index, doesn’t just hold shares of private equity companies. It offers a wide menu of income-generating assets, including business development companies (BDCs) and master limited partnerships (MLPs) as well as holding companies.

VanEck Vectors BDC Income ETF (BIZD)

Speaking of BDCs, there’s the VanEck Vectors BDC Income ETF (BIZD). With a jaw-dropping dividend yield of 8.38%, BIZD certainly fits the bill as an alternative income ETF, but there’s more to the story.

“BDCs provide capital to small businesses, and in turn, give investors access to the growth and income potential of private companies that are generally exclusive and difficult to access,” notes Coulter Regal, VanEck associate product manager. “One defining characteristic of BDCs is their high yield relative to more traditional income assets like corporate or government debt. The private credit nature of BDCs, paired with their tax efficient income pass-through structure and use of leverage, is what allows BDCs to offer these attractive yields.”

Another plus offered by BIZD, which benchmarks to the MVIS US Business Development Companies Index, is protection against rising interest rates – a trait that’s hard to find among high-yield assets. BIZD offers that because most of the loans held by BDCs are denominated in floating rate notes – one of the best forms of bonds to own when rates rise.

Global X Nasdaq 100 Covered Call ETF (QYLD)

The Global X Nasdaq 100 Covered Call ETF (QYLD) brings a distinct income proposition to the Nasdaq-100 Index, which traditionally is a low-yield benchmark. The largest ETF in the Global X lineup, QYLD has a whopping trailing 12-month yield of 13.73%.

Covered calls perform best when markets are rangebound. The way it works is that a fund writes (sells) call options on a specific index, either the S&P 500, Nasdaq 100, or Russell 2000,” according to Global X research. “The income from selling the options is paid out to investors in the form of yield. Investors have full exposure to the downside, as the calls expire worthless in a down market. And they have capped exposure on the upside, as the underlying can be called away. When volatility rises, the premium received rises to compensate for the higher volatility in the market.”

To go along with that big yield, QYLD provides monthly income and a compelling avenue for dealing with lethargic market settings.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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