More Ways To Secure Income That Won’t Be Wiped Out In A U.S. Downturn
There are few options when it comes to international income from corporate bonds and preferred shares. Since the choices for preferred share ETFs is so small, it is better to hold international utilities equities to replace the bond/stock hybrid of preferred shares. EMCB and DBU are the two best choices for international income/compounding. In my last article I discussed various ETFs that would help your portfolio in case of what I see to be an inevitable major crash of the U.S. In that article I ruled out most corporate bond and preferred share ETFs as a means of safe income/compounding, but within the realm of those two categories, there are better choices and worse choices. So we will look at which ETFs can still have the most protection from a crash scenario. One of the main reasons to hold a fixed income investment is to put an emphasis on safety of principal over higher yield. It is unfortunate that so many people have been basically pushed out of savings accounts and into stocks, but some types of corporate bonds and preferred shares might be better for the savers and conservative investors. If you want to read more about why I talk about only corporate bonds and no government bonds, check out my latest Instablog on the topic. Corporate yields are certainly better than government bonds, but there is the inherent default risk. When it comes to chasing high yield in junk bonds, that activity is much closer to speculation than investing. So the key is to find a happy medium where you are getting sufficient yield without too much risk. The credit rating is not the only risk though, as I am looking at ways to generate some income that won’t be affected too badly by a major downturn of the U.S. economy. When it comes to the type of businesses that I want to get income from, I prefer to exclude the financials because I think that they will be affected the most out of any other sector during a downturn. Companies that produce/sell a tangible good or service are the kind that I want income from. Not to dismiss all banks or insurance agencies, but the kind of productivity that happens in tangible companies are different than the productivity of a financial company. There are a few choices as far as international corporate bond ETFs but very few ex-financial corporate bond ETFs. It is unfortunate that there are no corporate bond funds that try to exclude the U.S. as well as the financial sector. The international corporate bond funds are too exposed to the financials and the small list of non-financial funds are too exposed to the U.S. So here is my pick for the best corporate bond fund choice, the WisdomTree Emerging Markets Corporate Bond ETF (NASDAQ: EMCB ). This fund is one of the few that does not include any U.S. companies. Here are all of the choices for international corporate bond ETFs. Ticker Symbol Yield Expense Ratio Investment Grade Credit Quality* Financials Exposure* Non-U.S. Exposure* EMCB 4.97% 0.60% 57.92% 11.69% 100.00% HYEM 6.69% 0.40% 1.59% 34.70% 98.60% CEMB 4.17% 0.50% 68.43% 14.21% 100.00% IBND 1.23% 0.50% 100.00% 51.22% 77.47% IHY 5.50% 0.40% 0.55% 27.00% 97.71% HYXU 4.18% 0.40% 0.00% 21.65% 94.91% GHYG 5.12% 0.40% 0.41% 12.14% 37.95% PICB 2.55% 0.50% 100.00% 52.13% 100.00% *As a percentage of holdings. I have included both emerging markets and developed international funds, the difference is not that important in terms of what would be best protected in a downturn. The important aspects for me are how much exposure do they have to the U.S. And to the financials. Also, I want to find the right balance between investment grade and junk status holdings. Having 100% investment grade bonds will not give you much yield, so this is why I like EMCB for having a good mixture. The almost 5% yield is a decent return without having to behave like a speculator in chasing yield among junk bonds. Only 11% of its holdings are in financials and there are no US companies included at all. The choice of preferred share ETFs is much smaller than all of the corporate bond ETFs, so there is even less variety to meet the needs of avoiding exposure to the U.S. Just as with the case of the corporate bond funds, the international ETFs holdings have too many financials, and the only non-financials preferred share ETF holds entirely U.S. companies. The best solution to this problem is to skip the preferred share funds and instead go with utilities equities. Utilities are known to be a defensive stock that behaves more like a bond, and preferred shares are a hybrid of corporate bonds and common shares, I think this can take the place of preferred shares pretty well. The utilities sector should prove to be one that is relatively safe during economic turmoil, but the companies should be outside the U.S. to have the best insulation from a downturn. Here is all of the choices for international utilities ETFs. *As a percentage of holdings. The main consideration for these funds is to have as much of the holdings as possible be outside the U.S. This makes DBU my choice for the best utilities ETF to hold for income and protection. There are no American companies in its holdings, and it offers the best yield out of all the other international utilities ETFs. The expense ratio for DBU is higher than I would like, but the yield along with the proper exposure is enough to make it still worth owning. Since the U.S. dollar is still the reserve currency, a major U.S. downturn will ripple across the whole world, just as the last financial crisis did. This would affect these two income ETFs too, but the premise of internationalizing is to limit the effects of such a major event. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.