Seeking more than single-digit returns and leery of the U.S. stock market, many planners and investors are increasingly searching for a better deal. "They're going into higher-yield dividend-paying stock funds, high-yield bond funds and Asia-Pacific funds to avoid U.S. bank exposure," says Michael Rawson, an ETF analyst at Morningstar. "Of course, reaching for greater yields means taking on more risk."
Jeff Tjornehoj, the head of Americas Research at Lipper, adds: "Stock market returns have moved into the high single digits in recent months. The problem is that rallies are often cut short almost as they begin, which causes a lot of hesitation among investors."
As an alternative to stocks, investors are being attracted to high-yield bond funds like SPDR Barclays Capital High Yield Bond and iShares iBoxx High Yield Corporate Bond. Both have generated year-to-date returns of more than 9%. At the same time, iShares has had a net inflow of $4.2 billion and Barclays has gained $1.99 billion. For the past three months, the return of iShares iBoxx High Yield Corporate Bond slipped, however, to 5.4%, while the Barclays ETF declined to 5.49%. Both rank among the 20 largest U.S. ETFs.
Among high-dividend equity funds, Vanguard Dividend Appreciation is up a healthy 8.28% and Vanguard's High Dividend Yield Index registered 10.66%, a bit more than the 10.55% return produced by iShares High Dividend Equity.
Among all ETFs that Morningstar tracks, iShares Dow Jones U.S. Home Construction registered the highest three-month return: 15.16%. In second place, SPDR S&P Homebuilders had an 11.51% yield. Energy funds ranked as the worst performers. Market Vectors Coal was down 7.7%, for instance, and First Trust ISE Global Platinum Index fell 6.38%.
As for other industry sectors, Tjornehoj is especially high on agriculture - or at least on corn and grain. "The severe drought has played a huge role in driving up the price of corn and, to a lesser extent, grain," he says. Among the ETFs in this sector is Teucrium Corn, which soared 21.37%.
But Tjornehoj is bearish on soybeans, coffee and sugar. He says any agricultural fund that includes significant weighting of these commodities should be avoided.
Some conservative investors are being draw, to publicly traded energy and infrastructure master limited partnerships, Rawson says. "MLPs offer tax advantages, attractive yields and low correlation to equities," he notes. The fund flow to JPMorgan Alerian MLP Index through July amounted to $1.3billion, while the ALPS Alerian MLP ETF drew in $1.7 billion. YTD returns for these MLPs have been 5.15% and 2.73%, respectively. "While MLPs have not done as well as the S&P 500, they have attracted a lot of fund flows," he explains.
Besides healthy yields, investors are seeking transparency and liquidity, according to Alex Cabot, a quantitative analyst with Wiley Group, a wealth advisory firm. "Today and in recent years, we've seen a huge increase in people looking to invest in proven, very simple index funds," Cabot says.
"They're staying away from the more complex and usually smaller funds that rely on quantitative algorithms. Investing in such funds requires a far more complex investment strategy."
Laton McCartneyis a New York writer who has contributed to Money Management Executive and Information Management.
