How to Play the Global Income Game

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

With large mainstream U.S. income funds like Vanguard Total Bond Market ETF (BND) yielding just 2.43%, it has been a tough environment for retirees and other income investors.

That means that each $1 million in your retirement portfolio yields a paltry $2,025 per month. That’s hardly a king’s ransom.

That’s why U.S. retirees and income investors have been diversifying into other income-generating vehicles with higher yields.

The Biggest and Most Ignored Investment on the Planet

Alternatives to U.S. bonds include everything from Real Estate Investment Trusts (REITs) to Business Development Companies (BDCs) to Master Limited Partnerships (MLPs) and beyond.

A diversified portfolio consisting of 10 income investments that I track on a daily basis offers a terrific balance of risk and return. It boasts a solid yield of 4.52% — almost twice that of traditional income funds — with many investments paying out dividends on a monthly basis.

Among this portfolio of income investments is one asset class U.S. investors have all but ignored: foreign debt.

Just as U.S. investors have a “home country” bias by investing the bulk of their equity investments in U.S. stocks, they are also reluctant to invest the income portion of their portfolio in foreign bonds.

That’s ironic because foreign debt — when you take both sovereign and corporate debt together — is the single-largest asset class in the world.

Say, you invest your portfolio along the lines of a traditional 60% stock and 40% bond portfolio.

Weighting your portfolio purely according to market capitalization, you should have roughly 50% of your stock allocation in foreign stocks.

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And you should also have 30% of your bond allocation in foreign income investments.

Yet, the average U.S. investor has approximately 0% invested in international bonds.

While U.S. investors are tip-toeing back into international stock investments in 2017, foreign bond investments remain the red-headed stepchild in international investing.

What about Currency Risk?

U.S. investors often point to currency risk as the reason for avoiding foreign income investments.

But currency risk cuts both ways.

Here’s why it is less of a worry than you think.

First, currency valuation is a relative game. You can think of income denominated in foreign currency as a hedge against a decline in the value of the dollar.

With the U.S. dollar trading near record highs, any income generated in foreign currencies will get a boost as the value of the U.S. dollar returns to more normal levels.

Second, there are ways to invest in foreign income investments without exposing yourself to currency risks.

Some international bond ETFs, especially those targeting emerging markets, hold foreign debt securities denominated in U.S. dollars. These offer some of the highest yields you can earn and come with no currency risk attached.

Three Ways to Play the Global Income Game

I. Global X SuperDividend ETF (SDIV) — 6.77% Yield, Paid Monthly

This ETF tracks the Solactive Global SuperDividend Index, an equally-weighted index consisting of 100 equally-weighted companies that rank among the highest-dividend-yielding equity securities in the world.

Now, remember that “global” doesn’t mean international. SDIV has about one-half of its investments in U.S. stocks. As U.S. dollar-based investments, you are not taking in any currency risk in this section of the portfolio. The remainder is invested in high-dividend-yielding companies in Europe, Australia, Asia, Canada and Latin America.

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In terms of sectors, it’s no surprise that SDIV focuses on financial services and consumer cyclicals, which together make up about 60% of its portfolio.

SDIV yields an impressive 6.77%, pays dividends monthly and charges a fee of 0.58% annually.

SDIV has generated a total return of 5.61% year to date.

II. PowerShares Emerging Markets Sovereign Debt (PCY) — 4.98% Yield, Paid Monthly

This ETF invests in U.S. dollar-denominated emerging markets bonds. As such, it does not have any direct foreign currency exposure. Emerging markets’ sovereign bonds do carry credit risk, whereas U.S. Treasuries are “risk-free.”

Thanks to improving fundamentals and relatively higher yields in emerging markets, demand for emerging-markets’ debt has skyrocketed during the last few years. Emerging-markets’ debt has also historically exhibited low correlations to U.S. bonds.

PCY yields 4.98% — a substantial premium over U.S. debt. It pays out monthly and has generated a 7.59% gain so far in 2017.

III. iShares JPMorgan USD Emerging Markets Bond ETF (EMB) — 4.68% Yield, Paid Monthly

The iShares JPMorgan USD Emerging Markets Bond ETF tracks an index of U.S.-dollar-denominated sovereign debt issued by emerging-market countries with more than $1 billion outstanding and at least two years remaining in maturity.

Most importantly, EMB holds USD-denominated rather than local-currency debt. This eliminates currency risk for U.S. investors.

EMB was one of the first emerging-market debt ETFs. As a result, the ETF has terrific liquidity, making it a top choice for many investors.

EMB yields 4.68% and pays out monthly. It has generated a 7.13% gain in 2017.

P.S. Global investing is all about momentum. So is my new trading service, Momentum Trader Alert. With 36 of the 47 global stock markets I track up by at least double-digit percentages so far this year, you can be sure that you’ll see a lot of global stock picks in the service in the months ahead. To find out more, please click here.

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What I’m Reading

Warnings: Finding Cassandras to Stop Catastrophes

Smart Beta Bond ETFs Could Be the Next Frontier

Why It’s So Hard to Admit You Are Wrong

How a Trading Algorithm Actually Works

What I’m Listening to

Ep. 230: R.P. Eddy – How to Discover The Secrets In Life

What I’m Watching

Billions

In case you missed it, I encourage you to read my e-letter from last week about the improving prospects of emerging markets.

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