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    Equity Income in Today’s Market

    Fran Rodilosso ,CFA, Head of Fixed Income ETF Portfolio Management
    June 14, 2019
     

    The U.S. Federal Reserve’s (Feds) change in outlook surprised the market earlier this year. We are now looking at an easing monetary policy—perhaps an interest rate cut, rather than hikes, in 2019—and the prospect of the Fed shrinking its balance sheet far less than the market previously expected.

    The greater liquidity in the market and low base rates have already had two significant effects, in our view: 1) markets have been “risk on” again, combined with some hope for the continued extension of recent economic expansion; and 2) within fixed income in general, people are having to look for new sources of yield as yields on U.S. Treasuries have come back down.

    The question is, therefore, how to achieve portfolio diversification and obtain greater income than that generated by Treasuries. Opportunities we see include high yield, emerging markets debt, or tax-advantaged solutions. Equity income, too, is now back on people’s radar screens. And preferred shares also provide an option.

    Dividend Income

    In the ETF space, dividend income is a widely used strategy with variety of products that take many different approaches. Last year, in partnership with Morningstar, we launched a new ETF, the VanEck Vectors Morningstar Durable Dividend ETF (DURA®).

    What we particularly like about DURA’s underlying index is that Morningstar’s equity research team looks not only at the long-term durability of dividend payments, but also at both the attractiveness of constituent companies’ valuations and their financial health.

    Preferred Equity

    Another approach could be to look at preferred shares, which lie between bonds and equity in a company’s capital structure. While some preferred equity may have either no, or a sub-investment grade rating, the majority of preferred issuers are rated investment grade with regard to their senior debt. Yet, because of their place within a company’s capital structure and what tends to be longer duration, preferreds may provide yields equivalent to those of high-yield bonds. The VanEck Vectors® Preferred Securities ex Financials ETF (PFXF®) provides investors with access to this space. The fund tracks the overall performance of U.S.-listed preferred securities excluding those with a financial sector classification.

    High-Yield Bonds

    We are often asked about the size of the investment grade U.S. corporate bond market and particularly the BBB universe. With that segment of the investment grade market now at around $3 trillion, will there be more bonds than the high-yield universe can absorb if (or when) the credit cycle ends, the economy slows down, and there is a wave of downgrades? Our short answer is: “Probably not!” Although we do see there being more fallen angel bonds, or high-yield corporate bonds that were originally issued as investment grade bonds, we believe that this will create some further opportunities in high-yield bonds. Investors can gain exposure to this space through the VanEck Vectors® Fallen Angel High Yield Bond ETF (ANGL®).

     

    For more insights, watch VanEck portfolio manager Fran Rodilosso’s video on equity income here.

    IMPORTANT DISCLOSURE

    This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    Indices are unmanaged and are not securities in which an investment can be made. Index returns are not fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes.

    An investment in the VanEck Vectors Morningstar Durable Dividend ETF may be subject to risks which include, among others, investing in equities securities, consumer staples, energy, health care, and information technology sectors, medium-capitalization companies, dividend paying securities, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.

    The Morningstar® US Dividend Valuation IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Vectors Morningstar Durable Dividend ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® US Dividend Valuation IndexSM is a service mark of Morningstar, Inc.

    An investment in the VanEck Vectors Preferred Securities ex Financials ETF may be subject to risk which includes, among others, preferred securities, convertible securities, foreign securities, credit, interest rate, subordinated obligations, REITs, utilities, consumer staples, telecommunications, real estate, small- and medium-capitalization companies, market, operational, call, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the fund.

    An investment in the VanEck Vectors Fallen Angel High Yield Bond ETF may be subject to risk which includes, among others, high yield securities, foreign securities, foreign currency, credit, interest rate, restricted securities, market, operational, call, sampling, basic materials, energy, financial services, telecommunications, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares and concentration risks, all of which may adversely affect the fund.

    Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.

    Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

    Van Eck Securities Corporation, Distributor

    666 Third Avenue

    New York, NY 10017

    800.826.2333