The first major chink in the dollar’s armor was felt by Wall Street recently when a key employment data point effectively sent the Fed off the playing field and right to the showers. The dollar has been under heavy pressure following the July 31 release of low data regarding the U.S. Employment Cost Index (ECI). The latest reading marked the lowest-ever ECI figure and was seen by many observers as impeding the Fed’s ability to raise interest rates in the near term. As a result, the dollar index got crushed.
Upon release of the data, the dollar sharply fell to lows for the session, and it has extended those losses in the face of the additionally released positive Purchasing Managers Index (PMI) and in-line with the latest University of Michigan consumer sentiment data. In a surprise counter-intuitive move, oil traded lower overnight, extending weakness following commentary from OPEC that indicated the cartel has no plans to cut near-term production. After falling to session lows near $47.40/barrel, WTI rallied on the dollar’s weakness back to the flat line but has since moderately retraced back to -1.3% at $47.86/barrel.
After putting the investment community on the edge of its collective chair, the bond market has regained a love of yield-starved sovereign funds as the 10-year Treasury Note yield is back down to 2.20% from its recent 2.45% level. Any further breakdown in commodity prices and the Chinese stock market will keep Asian fund flows moving aggressively into safer-haven, U.S.-backed government debt. It is a wake-up call for Fed watchers and a highly bullish development for high-yield assets.
The ground just shifted for money flow and is heading back into dividend-paying stocks and bond equivalents. One way to play it from an aggressive standpoint is to consider investing in exchange-traded notes (ETNs). As a hybrid security that uses leverage that tracks an income-bearing index, ETNs provide diversity and leveraged monthly income without the use of a margin account. They are debt obligations issued by Switzerland’s largest bank, UBS Group AG (UBS), and thus carry an implied level of creditworthiness that most banks would kill to obtain.
There are dozens of UBS ETNs from which to choose. But as for which is the timeliest, the ETRACS Monthly Pay 2x Leveraged US High Dividend Low Volatility ETN (HDLV) is my favorite. The fund was launched in September 2014 and thus is relatively new. The basket of stocks in the underlying index are some of the bluest of blue-chip dividend stocks available. The top 10 holdings as of July 31, 2015, are:
|Verizon Communications Inc.||VZ||9.78|
|Philip Morris International||PM||9.53|
|Altria Group Inc.||MO||8.75|
|Duke Energy Corp.||DUK||6.79|
|Health Care REIT Inc.||HCN||3.79|
|Consolidated Edison Inc.||ED||3.54|
There are 40 total holdings that comprise the underlying Solactive U.S. High Dividend Low Volatility Index, which is trading at a nice 5% discount to its January high, when fear of Fed tightening began to pressure dividend-based equities. Now that bond investors seemingly have been given the green light, capital is once again flowing into utilities and real estate investment trusts (REITs), the immediate go-to beneficiaries of such a rotation.
And the best part of the situation is that the Solactive US High Dividend Low Volatility Index pays a yield of 5.05%. As a double-leveraged fund, HDLV produces a current yield of 10.10% for shareholders. In addition, HDLV pays monthly instead of quarterly. With the fresh tailwinds of softer economic data and earnings behind the bond market, it’s full sail for income investors who seek equity income from a very creative hybrid instrument. HDLV is just one of several ETNs held in the model portfolio of my Cash Machine investment newsletter.
In case you missed it, I encourage you to read my e-letter column from last week about how the higher dollar is making for stiff resistance. I also invite you to comment in the space provided below my commentary.