Right now might not seem like the most important time to buy rate-hedged or short duration funds. The Fed is supposed to be on “pause” after all. However, in our view, now might be a critical time to have some rate hedged assets in the portfolio. The reason why is that yields have pulled back strongly from just a couple of months ago, including yesterday, but given the fact that it is almost purely the Fed which has caused the sharp reversal, rates could swing just as wildly higher if their comments, or economic data, changes. In other words, the bond market looks overbought right now because of Fed comments, but it could easily snap back to where it was in December in violent fashion.
FINSUM: We think this is a time for caution on rates and yields given how strongly the market has reversed over the last couple of months.
Stocks have been doing well this year, but we are willing to bet that the sectors that have been performing best over the last 12 months are not the ones you expect. With all the fears over rate hikes in the last year, it is hard to imagine that utilities and REITs are both up nearly 20% in the last 12 months, far ahead of the S&P 500’s 4.08%. Even tech is only up about 5%.
FINSUM: The most exciting thing about this performance is that the runway for income investments looks like quite strong—the Fed is unlikely to hike, which means there seems to be little rate risk.
Barron’s has been running a series of articles outlining the best dividend funds by different category. They have also put out a piece outlining the best performing dividend funds overall. The funds mentioned below have all provided top performance over the last half decade. The three top funds are the Vanguard Dividend Growth Fund (VDIGX), The Bishop Street Dividend Value Fund (BSLIX), and the Madison Dividend Income Fund (BHBFX). The Vanguard fund has achieved an annual 10.19% average return over the last five years, just under the S&P 500’s 10.67%. Its fees are much lower than the others at only 0.26%.
FINSUM: VDIGX is a great option for solid dividends and returns, but the field of these kinds of funds is growing and diverse.
Today we wanted to write a story covering the topic of rate hedged ETFs. We have been examining these lately and feel they are in high demand because of the need for stable income for retirees and the still-relevant threat of higher rates. Mortgage REIT ETFs, such as iShares’ REM really caught our eye with 9%+ yields. However, they are very rate sensitive, so we wanted to find a better option. Enter ProShares’ HYHG, or the High Yield-Interest Rate Hedged ETF. The fund yields over 6% in a highly hedged manner, it goes long high yield US and Canadian debt and simultaneously shorts US Treasuries. The expense ratio is 0.50% and the fund has $127 under management.
FINSUM: This seems like a great fund to us—6% income with only 50 basis points in fees, all in a rate hedged package.
If you are of the opinion that rates are not going to move higher, or if just want some great yields and aren’t too worried about rates, take a look at mortgage REIT ETFs. Mortgage REITs are a special subsector of the REIT industry, and have recently become greatly more accessible because of ETFs. For instance, consider the iShares Mortgage Real Estate ETF (REM). The fund has a 30-day SEC yield of 9.36%. It is obviously rate sensitive, but even during last year’s brutal hiking cycle, it only lost 3.75%.
FINSUM: If the Fed stays put this year, which it likely will, these could be a great investment as we head into a downward rate cycle.