Income Monitor: Q1 2020

May 8, 2020

The Global X Income Monitor for Q1 2020 can be viewed here. This report seeks to provide broad, macro-level insights into the income characteristics of various asset classes and strategies.

Q1 was a turbulent period marked by a black swan event. COVID-19 wreaked havoc on the financial markets and the real economy. Income investments were on the front end of much of this speculation, with dividend yields expanding to abnormally high levels and credit spreads hitting record levels.

With the Fed dropping rates to zero and providing enormous liquidity to the market across a variety of bond sectors, income investments largely avoided disaster. Yet risks still remain. With companies in cash preservation mode and the government mandating emergency loans coincide with a moratorium on buybacks and dividends, equity investors could see less income in the coming quarters. Bond markets carry risks too, as downgrades occur at a rapid rate, with over 80% of downgrades by S&P to companies in junk territory.1

Further stressing income investors may be the lack of yield in higher quality investments. With the 10 year treasury bond well below 1%, investors cannot rely on government debt for meaningful income. This will force investors to continue to look at riskier areas of the market to achieve their income needs.

One option to consider is covered call strategies, which generate income from selling call options on equity positions. Such an approach limits the upside of one’s position in exchange for current income from the option premiums. Historically, periods of higher volatility result in higher option premiums.

The preferred stock segment is not immune to the broader challenges in the income space, but could be well-positioned over the long run. Most preferred issuers are well-capitalized financial institutions like banks and insurance companies. While their common stock dividends could be at risk from regulators, current legislation does not include preferreds in the dividend suspension mandate. In addition, preferred issuances are often ‘cumulative’, meaning preferred stockholders are paid before common stockholders in the event of a coupon and dividend suspension.

Category: Articles

Topics: Dividends, Income Strategies

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Neither Global X Funds nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

Investing involves risk, including possible loss of principal. High yielding stocks are often speculative, high-risk investments. These companies can be paying out more than they can support and may reduce their dividends or stop paying dividends at any time, which could have a material adverse effect on the stock price of these companies.

Bonds and bond funds will decrease in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments.

Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. In addition, preferred stock may not pay a dividend, an issuer may suspend payment of dividends on preferred stock at any time, and in certain situations an issuer may call or redeem its preferred stock or convert it to common stock.

An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date. A covered call option involves holding a long position in a particular asset, in this case U.S. common equities, and writing a call option on that same asset with the goal of realizing additional income from the option premium. By selling covered call options, the investor limits their opportunity to profit from an increase in the price of the underlying asset above the exercise price, but continue to bear the risk of a decline in the underlying asset.

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Global X Management Company LLC serves as an advisor to Global X Funds. The Funds are distributed by SEI Investments Distribution Co. (SIDCO), which is not affiliated with Global X Management Company LLC. Global X Funds are not sponsored, endorsed, issued, sold or promoted by Solactive AG, FTSE, Standard & Poors, NASDAQ, Indxx, or MSCI nor do these companies make any representations regarding the advisability of investing in the Global X Funds. Neither SIDCO nor Global X is affiliated with Solactive AG, FTSE, Standard & Poors, NASDAQ, Indxx, or MSCI.