This year’s market volatility may extend into 2016 as the Federal Reserve seeks to set policy amid a slowing global economy, falling commodity prices, currency devaluations in Europe and Japan and a U.S. presidential election.
Investors seeking stable income in this environment may want to consider diversified exchange-traded funds and actively managed funds to avoid the pitfalls of betting on a few companies or industries, writes David Fabian, an investment adviser at FMD Capital Management.
“If 2015 has taught us anything it's that there is a high degree of risk in individual high yield sectors such as master limited partnerships and junk bonds,” he writes in a Seeking Alpha blog
. “In addition, the trendless direction of interest rates will likely lead to above-average volatility in high quality fixed-income holdings.”
His top “investment themes” for next year are centered on large, diversified and proven investments that avoid individual industries, he says.
“That may seem boring to those who like to tempt fate with the glory of a turnaround story or make assumptions in continued strength of momentum names,” Fabian writes.
3 Income Funds for 2016
- Vanguard High Dividend Yield ETF (VYM): “This exchange-traded fund houses 435 U.S. stocks with characteristics of consistently high dividend yields. I like to think of this fund as the "S&P 500 of dividend stocks" because of its market-cap weighted structure and broad index construction methodology. It's simply difficult to find a better investment vehicle for those that crave a low-cost, dividend-focused stock fund.”
- PIMCO Income Fund (PONDX): “This fund has an admittedly higher expense ratio than a comparable ETF at 0.79 percent. However, the performance over the last several years has well compensated investors for the superior security selection and risk management techniques.”
- Vanguard Wellesley Income Fund Admiral Shares (VWIAX): “This fund is one of the few actively managed offering from Vanguard that has been in existence for over 40 years. The fund invests in a mix of income generating assets that fluctuate between 35 percent to 40 percent stocks and 60 percent to 65 percent bonds. The stock allocation consists of 59 large-cap names.”
“These three income funds offer solid value in 2016 by sticking with investment themes that have historically provided dependable results,” Fabian writes. “They can also be supplemented with tactical or alternative investment themes to enhance the overall yield of your portfolio or capitalize on a relative value opportunity.”
Meanwhile, Bill Gross, manager of $1.3 billion Janus Global Unconstrained Bond Fund, said a selloff in junk bonds is making them comparable to stocks.
Gross said he would prefer junk bonds with yields of 6 percent to 8 percent over stocks yielding about 2 percent, according to CNBC
“This is the perfect time in terms of an illiquidity discount for what are known as closed-end funds,” Gross said. “It’s like the pelicans in Newport Beach. They’re just diving down and picking out those fish. It’s just loaded with bargains.”
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