Income Monitor: Q4 2019

The Global X Income Monitor for Q4 2019 can be viewed here. This report seeks to provide broad, macro-level insights into the income characteristics of various asset classes and strategies.

Q4 proved to be a positive period of equity market performance despite a lack of robust earnings data. Energy, Real Estate, & Utilities finished out the quarter with the highest dividend yields of the S&P 500 sectors. High Yield bonds rallied on strong funding conditions and an active deal pipeline. In spite of challenges out of certain Emerging Market (EM) nations like Lebanon, EM bonds were buoyed by the rally.

However, we’ve seen the beginning of 2020 evoke market moves reminiscent of many historical flights to safety. The unexpected developments with the Coronavirus are pushing yields down, strengthening the dollar, and inducing volatility in equities. The near and long term economic impact is uncertain and while the Fed and other central banks globally may be accommodative, it’s unclear whether lowering interest rates will be enough to reinvigorate the global economy amidst a public health crisis.

We think Covered Calls are an important tool to potentially generate income in today’s environment. Stock markets are unlikely to be able to replicate the returns from 2019, which raises questions about how income investors can monetize their positions. Writing calls to generate premiums allow investors to stay invested in the market while taking call premiums at the same time. On volatile indexes like the Nasdaq 100, the premiums can be higher than other commonly followed indexes.

Preferred stock is tax advantaged and can offer investors high yields. Other options like High Yield bonds and Emerging Market bonds may be higher yielding, but can introduce greater credit and currency risks.