Multi-Asset Dividend ETFs For A Slowing Mkt

As economic growth slows, finding alternative sources of returns grows in importance.

We continue to believe that equity markets will move higher, but future gains may be both volatile and harder to achieve. This environment calls for some alternative sources of return—investments that are easy to access through ETFs.

Consider the price movement of industrial metals as one example of an indicator that suggests slow but steady global economic growth ahead.

When the pace of economic growth is increasing, industrial metal prices tend to move higher as demand for commodities—such as iron ore and copper—goes up. While we are not seeing sustainable price increases in these spaces, neither are they not declining significantly. Industrial commodity prices tend to plummet with the onset of recession.

Simply put, the range-bound price action of industrial metals is one of the indicators that leads us to expect the pace of global economic growth to steady at a sustainable rate (Exhibit 1).

What Does This Mean To Investors?

While a slow pace of economic growth may limit the potential for stock market appreciation, other sources of return—such as high quality yields—can offer both enhanced return and risk mitigation.

As a result, and consistent with our approach to managing risk in real time, we favor investments that we think offer greater consistency, lower volatility and a higher yield than the overall market.

There are many multi-asset allocation ETFs focused on income that fit that bill. They blend income-producing assets, including mortgage REITs, preferred securities, high yield and emerging market bonds. These diversified blends offer relatively consistent returns primarily through an attractive yield, and an overall low correlation to the traditional stock and bond markets.

Another segment worth considering is dividend growth ETFs. They invest in U.S. companies across a wide array of economic sectors that have shown consistent dividend growth over time.

The ETF market offers several products for investors looking to capture these themes. A few of our favorites include the iShares Morningstar Multi-Asset Income ETF (IYLD), and the iShares Core Dividend Growth ETF (DGRO).

IYLD—a fund of funds—is designed to allocate about 60% to fixed income, 20% to dividend-focused equities and 20% to REITs and preferreds. According to FactSet data, IYLD has a distribution yield (over the past 12 months) of about 5.2%. The asset allocation strategy has almost $390 million in total assets and costs 0.60% in expense ratio, or $60 per $10,000 invested.

DGRO, meanwhile, is a $9 billion ETF that offers a no-frills dividend growth strategy where stocks are selected and weighted based on dividend-focused metrics. Steady dividend growth in this portfolio is defined as having a five-year history of consistent dividend increases while capping dividend payouts at 75% of earnings. With almost 500 holdings, DGRO costs only 0.08% in expense ratio—$8 per $10,000 invested.

Other tickers to consider include the SPDR SSGA Income Allocation ETF (INKM), and the Vanguard Dividend Appreciation ETF (VIG).

At the time of writing, Stringer Asset Management held IYLD and DGRO among its universe of ETFs included in its suite of ETF Portfolios. Stringer Asset Management is a Memphis, Tennessee third-party investment manager and ETF strategist. Contact Stringer Asset Management at 901-800-2956 or at [email protected]. For a complete list of relevant disclosures, please click here.