Many investors desire income and diversity from their investments. Before the Great Recession hit, many investors were confident that individual stocks would fulfill those desires. Carefully chosen individual securities can still meet those goals. But, thanks to the advent of exchange traded funds (ETFs), investors can now choose specific ETFs to meet those needs and avoid the risks that come with investing in a single stock instead of spreading out that risk by owing a basket of stocks via an exchange traded fund.
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Owning Bonds Made Easy
ETFs now allow investors an easy path to owning bonds, an often difficult and expensive process for many individual investors to do. Today, with American corporations sitting on more cash than ever, bond security is fundamentally sound. Of course, with that safety comes lower yields. Still, the SPDR Barclay's Capital High Yield (ARCA:JNK) offers investors a 4% yield, trades at about $36 and has a stated net asset value (NAV) of $37. As the name implies, JNK invests in high yield bonds, affectionately known as "junk bonds." Holdings include bonds of casino operator Harrah's and Lyondell Chemical. While trading at par with NAV, the iShares iBoxx Investment Grade Corp Bond (ARCA:LQD) yields 4.5%, and invests in bonds of the highest quality names like AT&T (NYSE:T) and Wal-Mart (NYSE:WMT). Shares in the ETF trade for $111 against a NAV of $111. (For related reading, see Using ETFs To Build A Cost-Effective Portfolio.)
Alternative Yield Options
Investors who are comfortable outside the safety of bonds can find ETFs offering significantly higher yields. The Alerian MLP ETF (ARCA:AMLP) invests in energy master limited partnerships. Energy MLPs do things like transport oil and gas via pipelines - businesses that generally have cash flows less susceptible to volatility. AMLP yields over 6% via its holdings in names like Kinder Morgan Energy Partners (NYSE:KMP) and Magellan Midstream Partners (NYSE:MMP). Kinder Morgan is one of the largest pipeline operators in the U.S. with over 15,000 miles of pipelines for transmission of natural gas and oil. Oil and natural gas pipelines are like the veins of the economic system; as long as the economy has a pulse, pipelines will always be in use.
The Bottom Line
With 10 U.S. Treasuries barely yielding above 2%, investors are likely to lose money with inflation, likely to approximate 3% over the upcoming years. ETFs provide a way for those investors seeking to earn above-average rates of return without the company specific risk tied to investing in one company. Investors who also hold them for a period of years, and may enjoy capital appreciation in the ETF price. (For related reading on inflation, see What You Should Know About Inflation.)
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.