The past two weeks have been an unwelcome wake-up call to investors.
Investors in speculative assets have seen billions of dollars wiped off their portfolios.
Well, don’t say I didn’t tell you so…
All of this signals a significant shift in investor psychology.
After every sustained sell-off, investors reassess expectations.
Almost overnight, “boring,” income-generating strategies don’t seem so boring at all.
Investors caught up in the fever of Cathie Wood’s Ark Innovation ETF (NYSE: ARKK) could not have cared less about income-generating stocks.
But now that the average investor in the ETF is underwater, that is changing.
With more than 2,200 ETFs trading on U.S. stock exchanges, there are thousands of alternatives to investing in high-risk, high-return story stocks.
ETFs allow you to bet on anything: U.S. stocks, foreign stocks, bonds, commodities, currencies… essentially any asset class under the sun.
In addition, you can assemble a portfolio of ETF strategies to achieve almost any investment objective.
Say you think the U.S. stock market is on the brink of a major and sustained collapse…
As I’ve written, inverse ETFs allow you to profit handsomely by betting against markets.
You can even increase your bets by investing in leveraged inverse ETFs.
What if you want to take a step back from the day-to-day ebbs and flows of the market… and instead focus on generating a steady and reliable source of income?
Well, ETFs allow you to do that as well.
Below are three ETFs with very different income-generating strategies immune from Mr. Market's mood swings.
No. 1: Saba Closed-End Funds ETF (CBOE: CEFS)
Saba is an actively managed ETF that generates high income by investing in closed-end funds trading at a discount to net asset value. The company selects these funds using fundamental and quantitative analyses.
Saba also hedges for interest rate risk.
It invests in high-yield securities supplemented by other non-fixed, high-income funds. The fund’s most significant bias is toward the energy sector, where it is consistently overweight.
Most of the underlying funds are actively managed. As a result, investing in Saba is a bet on the fund manager’s ability to pick other active managers.
The current composition of the portfolio is remarkably attractive, with its 12-month yield at a whopping 10.89%. Moreover, it pays out income monthly.
No. 2: Global X Nasdaq 100 Covered Call ETF (Nasdaq: QYLD)
Writing covered calls is a relatively low-risk, alternative way to increase your investment returns. Moreover, this conservative approach to trading options can produce additional income, regardless of whether the stock price rises or falls.
The process does require active management. And if you just want to “outsource” the process, consider buying the Global X Nasdaq 100 Covered Call ETF.
The fund tracks an index that holds Nasdaq-100 stocks and sells call options on those stocks to collect premiums.
Historically, the Nasdaq has been about growth stocks. But if that growth sputters, Nasdaq’s higher volatility offers income opportunities through selling expensive covered calls.
Global X was the first ETF to apply covered call writing to the Nasdaq-100.
Overall, this ETF’s returns are far less volatile than the Nasdaq-100’s.
Today, the Global X Nasdaq 100 Covered Call ETF offers a 12-month yield of 10.37%. It also pays out income every month.
No. 3: Pimco Municipal Income Fund II (NYSE: PML)
Municipal bonds are issued by a state, municipality or county to fund critical local projects, such as schools, highways and bridges.
A general obligation bond is issued by government entities and is not backed by revenue from a specific project, such as a toll road.
A revenue bond pays principal and interest through the issuer and is funded by sales, fuel, hotel occupancy or other taxes.
As investment-grade securities, municipal bonds are often less risky than corporate bonds.
Municipal bonds are exempt from federal taxes and most state and local taxes. That makes them especially attractive to investors in high-income tax brackets.
The biggest downside of municipal bonds is that they are illiquid. Offering a tax-free yield of 5.72%, the Pimco Municipal Income Fund II offers a terrific alternative to investing in municipal bonds directly.
A Diverse Source of Income
There are many other ways to generate income for your portfolio.
These include investing in dividend-paying companies, master limited partnerships, high-yield bonds, preferred stock or real estate investment trusts.
The good news is there are ETFs for each of these strategies…
And you can invest in them with the click of a mouse.
These income-generating strategies produce much higher income than investing in an S&P 500 index fund. For example, an equally weighted ETF income portfolio based on the ETFs above generates a yield of 9%.
That’s almost 7X the nearly 1.3% yield on the S&P 500 that we’re currently seeing.
The bottom line?
ETFs allow you to look beyond the conventional strategies of generating steady income in your portfolio.