Eq: Large Cap
It is no secret that oil and gas stocks have great dividends. What makes the sector special right now is that the sector is also looking like a good investment for capital appreciation because of the rise of the “commodities super cycle”. With all that in mind, check out these three names for good income: Marathon Petroleum (MPC) or its MLP, MLPX, Energy Transfer (ET), and Antero Resources (AR). All three opportunities currently offer double digit yields.
FINSUM: Oil is definitely in recovery mode, so the combination of value and income is compelling.
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Despite the big losses in Treasuries, high yield bonds have been doing well, and according to Fidelity that seems likely to continue. Advisors could be forgiven if they are wondering “how?”. The answer is that the big reason bonds are losing is interest rate risk, and it so happens that high yield bonds have some of the lowest interest rate risk around because of their higher coupons and shorter terms. According to Adam Kramer, who managers Fidelity’s Strategic Income Fund, “an economic recovery may be on the horizon and the Fed may avoid tightening monetary conditions for some time”, which he says means the high yield market “could offer investors the best of both worlds in 2021”.
FINSUM: High yield bonds have the lowest exposure to the market’s major risk at the moment and also the upside of an economic recovery. The picture is bright.
Bank of America’s Sell-side indicator that tracks equity allocation increased to…see the full story on our partner Magnifi’s site
Bonds are incredibly expensive right now, but despite this, they may keep going higher, says Goldman Sachs. The firm is specifically referring to high yield bonds, which are very pricey right now and have low spreads to Treasuries. For example, only 10% of high yield bonds currently trade with spreads above 5 percentage points above Treasuries, compared to 25% in November. This makes Goldman believe the easiest gains are already in the bag, but given that high yield bonds are sensitive to an improving economy and they have appreciated even while Treasuries have fallen, Goldman feels the asset class could be in for more appreciation.
FINSUM: This makes sense. It is also worth noting that historically speaking, high yield bonds have no correlation to the performance of Treasuries.
With the proliferation of ETFs and model portfolios and the growing amount of assets flowing into them, more and more AUM has been going into low vol and other risk management-oriented strategies. This is doubly true with the big volatility of the last year. However, a small cautionary tale to share today. If you take a look at LVHD, a popular “low volatility high dividend” ETF from Legg Mason, you see a fund that has significantly underperformed the S&P 500 and failed to protect investors from volatility. It is hard to know exactly why because the fund’s proprietary methodology is not transparent. However, even that fact is representative of the space. In their rush to defend against downside, many low vol ETFs and models can inadvertently and drastically underperform and expose investors to very low risk-return profiles.
FINSUM: What you get is not always what is being sold, so when choosing low vol products, make sure to pay significant attention to methodology and track record, especially during periods of volatility.