Desperate times call for desperate measures. This has surely been the name of the game for yield hungry investors of late, mainly thanks to the Federal Reserve’s extremely low interest rate policy.
While the Federal Reserve continues to print more money to boost the economy, it seems that income-seeking investors have to comply with the low interest rate scenario for some more time (read Zacks Top Ranked Bond ETF: SHV).
More often than not, income-seeking investors, like retirees and pension funds, are mostly conservative in nature and unwilling to take additional ounces of risk for higher returns.
This assumption, however, has not been fully justified of late. The frustratingly low yields have continued to push these investors towards high risk avenues in order to generate more income (read Gold ETFs Meet Covered Calls in Brand New GLDI).
How to Play
Utilities stocks and funds have for long been known as rich dividend payers. However, the dismal performance of the sector has kept investors away. Similarly, high yield bond (Junk) investors are also facing a dilemma with the present circumstances. After continuing their dream run for the past couple of years, these products may be finally approaching a dreaded bond bubble (see Target Date Bond ETFs: Best or Worst Fixed Income Funds?).
Meanwhile, MLP and REIT ETFs have also had to face the heat of the fiscal cliff sell off in the latter part of last year. However, these ETFs, especially MLPs have come back strongly this year with many of them posting double digit returns for the year already. For example, the J.P Morgan Alerian MLP ETN (AMJ) and the Credit Suisse Cushing 30 MLP ETN (MLPN) have added about 12.5% and 13% so far this year.
Unfortunately, valuations are approaching sky high levels in many instances as more investors fall in love with these products. As a result, some investors might want to consider other avenues in order to generate income for their portfolios at this time.
With this backdrop, we would like to highlight three ETFs which seem rather unconventional and thus may be overlooked by many seeking income. Still, any of them could go a long way in satisfying the needs of yield hungry investors at this time:
Crossover Bond ETFs
Crossover bonds are those fixed income securities that belong to the lower end of the investment grade bonds and the higher end of non-investment grade bonds. Naturally, these bonds have are prone to being up/downgraded more frequently than those safely in the corners of their respective ‘grade’ levels.
This may be the sweet spot for yield and risk for some investors in the bond world, as it combines a high payout with a relatively low default risk. For this reason, it could be an interesting play for investors seeking a new way to play the market without trending all the way into junk, or up into the top of investment grade either (see 3 Reasons to Consider the Crossover Bond ETF).