Income Monitor: Q3 2019

Dec 16, 2019

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

The beginning of Q4 marked the closing of the Federal Reserve’s second round of interest rate cutting. The Fed cut rates for the third time in 2019 in October. The yield curve steepened with the Fed’s latest round of stimulus. A brief period of flattening gave rise to concerns about the economy, but those fears subsided on stronger domestic economic numbers. The challenge, once again, is how investors find income. We expect the Fed to hold rates steady from here, but there’s close to no real yield from traditional fixed income investments today.

Energy is the only sector that pays high dividend yields following years of poor performance. Technical selling overrides the attractive valuations currently found in the sector. Master Limited Partnerships (MLPs) are a prime example of that dynamic. Fundamentals in the asset class remain strong, but prices fell through most of Q3. A 2020 turnaround in MLPs could be imminent if valuations normalized.

Real Estate Investment Trusts (REITs) present a problem and a solution for income investors today. REITs rallied significantly as the Fed cut rates, but yields are precipitously dropping. Now may be an opportune time to look for more attractive valuations in the REIT space, such as those with higher. Mortgage REITs often comprise this pocket of the market, and typically benefit from a steeper yield curve.

Covered calls are another potential approach to generate yield as it harvests volatility for income generation.

Category: Reports

Topics: Dividends, Income Strategies

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Past performance is not a guarantee of future results.

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.

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