Asset Classes for Yield-Hungry Investors
These investments offer yield and some portfolio protection
Skittish investors concerned about debt woes in
"Looking at core, traditional protective fixed income -- U.S. treasuries, cash -- it's hard to look at those now and say that's a good deal," says
Yields rose slightly on Wednesday -- 10-year T-bills yielded 3.14 percent, while five-year notes inched up to 1.7 percent -- but they still hover near historic lows, prompting many investors to seek other means of portfolio protection that don't sacrifice returns.
It might sound counterintuitive, but taking on a bit more risk can make a portfolio safer because it allows investors to capitalize on the benefits of diversification and capture more yield, Pride says. That extra yield can provide more cushion to help a portfolio withstand market swings.
To be sure, there will be fluctuations in the market, but those ups and downs might not warrant the "extreme" forms of protection -- historically super-safe U.S. Treasuries and cash -- investors are now flocking to. Instead, Pride and others suggest a more middle-of-the-road approach, which includes investing in asset classes that might skirt the riskier side of the fixed-income domain, but offer the boons of diversification and yield.
Here's a look at a few asset classes that still provide ballast for portfolios, but allow investors to reap better yields:
While payouts have decreased significantly over the past few years, investors can still find value in corporate bonds. Experts suggest sticking to shorter durations of between two and eight years to help mitigate interest-rate risk.
"The credit markets make up a large portion of the fixed-income world, so you should have diversified corporate bonds, not just Treasuries," says
Emerging market debt
Developed countries such as
The rationale is simple: Emerging markets bonds offer generous yields, and the prospects for growth in the underlying economies are stronger than those of developed nations. "They have been performing very well year-to-date, and if you believe the current trend in strengths of governments [will] continue, the wealth and power moves to the stronger governments," Lutts says.
Also, other countries have different interest-rate cycles, which can help mitigate volatility. "When the U.S. is doing poorly,
The currency exposure built into the WisdomTree Emerging Markets Debt fund can also help investors ride out a declining dollar, as central banks in developing countries raise their interest rates, boosting their currencies. For example, the Brazilian real is up almost 6 percent against the dollar this year, while the Russian ruble appreciated almost 9 percent compared with the dollar. For U.S. investors, foreign currency appreciation increases the value of assets once they are repatriated in
While fixed-income investments have traditionally been used to offset volatility in the stock market, experts say dependable blue-chip stocks can also help anchor a portfolio while still creating a stream of income. "It's a very bullish situation for equities for this environment," Lutts says. "Everyone is ignoring what could be the best asset class today."
It's best to focus on a handful of stable, high-quality stocks -- think
Regardless, it all comes back to playing the middle of the road in today's economic climate. With little hope of a big run-up in economic growth in the near future, investors have to be more creative -- and in some cases take on a bit more risk -- to achieve the desired balance between adequate portfolio protection and adequate growth.
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