Income Monitor: Q2 2020

Sep 1, 2020

The Global X Income Monitor for Q2 2020 can be viewed here. This report seeks to provide broad, macro level insights into the income characteristics of various asset classes and strategies.

Q2 marked a sharp rebound for equity and credit markets after a Q1 decline. Economic data began to improve towards the end of Q2, and the S&P 500 rallied north of 20% over the course of the quarter.

Dividend yields and credit spreads contracted after a massive expansion in Q1. The S&P 500’s 12-month dividend yield peaked at 2.70% in late March before finishing Q2 at a 1.95% yield, and investment grade spreads to the 10-year treasury fell by 164 basis points after topping out in late March.1

Treasury yields dropped to historically low levels as well. The 10-year Treasury yield ended last year at 1.92%, but by the end of Q2 fell to just 0.66%. investors moving assets into more defensive asset classes and overwhelming support from the Federal Reserve contributed to yields falling.

Income is still challenging to come by with interest rates at near zero levels. 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 have resulted in higher option premiums.

The intense equity market rally in technology-heavy indexes like the Nasdaq 100 could make the index an attractive candidate for a covered call strategy. Volatility has remained high on Nasdaq 100 and the run-up this year may raise questions about the persistence of the rally. For investors looking to generate income, a covered call strategy on the Nasdaq 100 may be an option worth considering.

Category: Reports

Topics: Dividends, Income Strategies

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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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