All eyes are on the Federal Reserve’s decision due out later today. Analysts agree that the central bank is increasingly concerned about inflation and thus will work on reducing the supply of easy money into the economy.
We should remind readers that Fed Chair Jerome Powell has recently suggested that a half-point rate increase is on the table. Nonetheless, ING also expects a shrinking of the Fed’s balance sheet:
“A 50bp interest rate hike…with quantitative tightening also announced.”
Knowing how broader markets may react to Fed’s steps to lower inflation and tighten credit is not easy. There are different views about the outlook for the rest of 2022 and even 2023.
Morgan Stanley suggests it will likely be a “battle between positives and negatives.” On the other hand, Goldman Sachs strikes a more cautious tone on how the S&P 500 index could fare in the coming months. So, it is more or less a wait-and-see kind of period to see what will actually happen.
Debates over worst- and best-case market scenarios are likely to dominate the headlines in May. Yet, retail investors have access to an extensive range of exchange-traded funds (ETFs) that could help them protect their capital and generate returns even in that environment.
Today, we introduce two funds that deserve readers’ attention, whatever the decision by the Federal Reserve could be.
1. Global X S&P 500 Covered Call ETF
Current Price: $47.12
52-week range: $45.85 – $51.16
Dividend yield: 9.19%
Expense ratio: 0.60% per year
Our first ETF uses covered calls to generate yield, an options strategy we regularly discuss. The Global X S&P 500 Covered Call ETF (NYSE:XYLD), which makes monthly distributions, could appeal to readers looking for income as well as some downside protection amidst the current volatility.
XYLD Weekly Chart
XYLD first buys shares of companies in the S&P 500 index and, at the same time, sells corresponding calls on the index. The ETF was first listed in June 2013 and currently has $1.54 billion under management.
Since January, XYLD has lost about 6.7% and comes with a dividend yield of 12.6%. By comparison, the S&P 500 Index is down 12.4% year-to-date (YTD).
In the coming weeks, we expect the XYLD fund to continue to hold up well and possibly even better than the broader market. We believe the upside potential for the S&P 500 is limited for the rest of the year, which would put the income offered by XYLD in the limelight.
Yet, covered call strategies limit a fund’s (or stock’s) capital appreciation potential in bull markets. Therefore, a fund like XYLD may not be wholly appropriate for those who expect the bull market to resume soon.
2. iShares Core Dividend Growth ETF
Current Price: $50.91
52-week range: $48.93 – $56.42
Dividend yield: 2.05%
Expense ratio: 0.08% per year
Our next fund, the iShares Core Dividend Growth ETF (NYSE:DGRO), invests in US companies with a history of consistently increasing their dividends. These stocks come from a wide range of sectors. The fund started trading in June 2014, and net assets stand at $22.9 billion.
DGRO Weekly Chart
DGRO, which tracks the Morningstar US Dividend Growth Index, currently has 418 holdings. Information technology (IT) names have the highest slice in the fund, with 19.78%. Next come financials (18.75%), healthcare (17.97%), industrials (12.93%), consumer staples (12.39%) and consumer discretionary (7.28%).
About a quarter of the portfolio is in the top 10 stocks. Among those names are Microsoft (NASDAQ:MSFT), Johnson & Johnson (NYSE:JNJ), Apple (NASDAQ:AAPL), Procter & Gamble (NYSE:PG), Pfizer (NYSE:PFE), JPMorgan Chase (NYSE:JPM), and Merck (NYSE:MRK).
DGRO hit a record high in early January but has lost about 8.9% since. The current price supports a dividend yield of over 2%. Meanwhile, trailing P/E and P/B ratios are at 17.59x and 3.32x. Long-term investors who are not worried about daily market fluctuations should research DGRO further.
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