Income obsession sweeps asset classes as stocks diverge

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What do you want to know

  • In the $6.6 trillion ETF arena, three dividend-focused funds rank in the top 10 by equity inflows so this year, Bloomberg reports.
  • Additionally, the up-and-down nature of equities has made bonds more attractive to some investors.

Behind the scenes of the latest equity rally, there is a growing penchant for stable income streams as risk appetite is hot and cold this year.

In the arena of $6.6 trillion exchange-traded funds, three dividend-focused ETFs rank among the top 10 in terms of stock inflows, according to data compiled by Bloomberg. The leader, the $36.5 billion Schwab US Dividend Equity ETF (ticker SCHD), has seen just five exits this year.

In the bond market, a mix of falling buying behavior and growth concerns sparked a strong rally in Treasuries after benchmark yields hit multi-year highs last month. Billions have been funneled into corporate debt, with the S&P 500 earnings yield holding the smallest advantage over the average yield on blue-chip bonds in more than a decade.

Demand for coupon breaks and reliable payments cast a cautious light on the largest two-day rally on record following the Federal Reserve’s rate decision.

As Fed Chairman Jerome Powell on Wednesday hinted at the potential for small rate hikes in the future, skeptics warn that persistently high inflation will prevent a pivot and send the economy into a recession. In this context, it makes sense to play it safe, according to AlphaTrAI’s Max Gokhman.

“The common denominator is defence,” said Gokhman, the company’s chief investment officer. “High-quality corporate debt and buying shares of companies with resilient balance sheets that can afford to pay a consistent dividend without worrying about excessive leverage or margin pressure is logical.”

While the S&P 500 climbed 9% in July, on track for its biggest month of gains since November 2020, the index is still down 13% this year. Strong earnings recently reassured traders, but uncertainty around a US recession and the trajectory of Fed rate hikes kept traders on their toes.

The up-and-down nature of equities has made bonds more attractive to some investors. The average yield on investment grade bonds is currently 4.35%, while the S&P 500 “yields” around 4.8% in earnings. That’s near the smallest gap since 2010.

“Really, where we’re starting to see opportunities is in the credit markets,” Russ Koesterich, portfolio manager of BlackRock’s global allocation fund, told Bloomberg Television. “If we’re going to be in an environment where equities are going to be volatile over the next few months, one of the things you can do in your portfolio is add carry. You can add income.

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