Today’s challenges for retirees and those nearing retirement are well documented. Traditional fixed income, which has served investors well for decades, now delivers little in terms of yield or capital gain potential. In the mid-1970s through the late 1990s when interest rates were extraordinarily high, U.S. 10-Year Treasury Bills paid between 7% and 8% annual interest and they helped retirees live a comfortable retirement.¹
Today, the yield on a 10-year U.S. government bond is about 1.2%², which does not add up to much of a monthly income, nor does it keep pace with the increase in prices for everyday consumer goods.
It’s going to take an approach that is different than the one your grandmother implemented to generate income, and provide stable returns and principal protection.
That different approach means employing a prudent diversification strategy in which you invest in higher-yielding bonds, as well as assets not traditionally viewed as income generators, such as dividend-paying stocks.
Here are some fresh approaches to generating income:
Invest in Other Types of Bonds: The dramatic fall in interest and bond yields over the past 40 years represents a real threat for individual investors, particularly those currently in retirement or approaching retirement. If bonds are to serve as a source of income and a hedge to lower risk in an overall portfolio, you may want to look into higher-paying bonds such as investment grade and high-yield bonds.
Investment grade bonds that are believed to have lower risk of default and receive high ratings by credit ratings agencies can help balance the risk in a portfolio. They can serve as portfolio insurance when there is a market downturn.
High-yield bonds are less sensitive to interest rates and inflation because they typically have low durations.³ The lower the duration, the less sensitive a bond will be to interest-rate changes. Another important factor in low duration is, with bonds maturing more quickly, that money can be reinvested into newer bonds with higher coupons (interest rates based on the face values or par values of the bonds.)
Invest in Dividend-Paying Stocks: Sure, stocks are more volatile than bonds, but equities increasingly are being viewed as a way to generate income. The case for generating income via stocks that pay dividends is that you earn income and also have the potential to profit from capital appreciation. But don’t get fooled into buying only high dividend payers because big payouts may come with a greater risk of default. Rather buy stocks with a history of boosting their dividends every year, because dividend growth is a sign of financial strength.
Invest in ETFs: With the proliferation of ETFs since 2000, investors and advisors can utilize ETFs to easily invest in a variety of asset classes in a low-cost, diversified manner. Prior to ETFs, investors and advisors had to spend many hours researching individual stocks and bonds, and/or they considered high-cost mutual funds.
That is why many advisors and investors invest in ETFs. Sound Income Strategies offers the Sound Enhanced Fixed Income ETF (SDEF) and the Sound Equity Income ETF (SDEI) specifically for those planning for retirement or in retirement. Both ETFs are actively managed by a team of experts who have been providing income-generating solutions to clients for 20 years.
SDEF’s primary objective is to deliver income, while providing the opportunity for capital appreciation by investing in fixed income securities. The ETF invests in a combination of investment grade and high yield bonds. The team uses a fundamental, “bottom-up” approach to analyzing individual debt securities.
SDEI’s primary objective is to generate income via a dividend yield that is targeted to be at least two times that of the S&P 500 Index. SDEI seeks to achieve its investment objectives by investing in common stock issued by dividend-paying, mid- and large-capitalization companies.
While traditional bond-only approaches to retirement income face headwinds, there remain many investment opportunities that can fulfill the void left by legacy fixed income retirement income investment solutions. Sound Income Strategies can help you achieve your clients’ goals and objectives for a successful, long-term retirement, just like that of their grandmothers.
Before investing you should carefully consider the Fund’s investment objectives, risks, charges, and expenses. This and other information is in the prospectus. A prospectus may be obtained by calling (833) 916-9056 or visiting www.soundetfs.com. Please read the prospectus carefully before you invest.
Investing involves risk, including the potential loss of principal. There is no guarantee that the Fund’s investment strategy will be successful.
Since the Fund is actively managed, it does not seek to replicate the performance of a specified index. The Fund may frequently trade all or a significant portion of its portfolio; and have higher portfolio turnover than funds that do seek to replicate the performance of an index. Equity securities such as common stocks are subject to market, economic and business risks that may cause their prices to fluctuate.
The securities of large-capitalization companies may be relatively mature compared to smaller companies and therefore subject to slower growth during times of economic expansion. The securities of mid-capitalization companies may be more vulnerable to adverse issuer, market, political, or economic developments than securities of large-capitalization companies.
The Fund is considered to be non-diversified, which means that it may invest more of its assets in the securities of a single issuer or a smaller number of issuers than if it were a diversified fund.
Shares may trade at a premium or discount to their NAV in the secondary market. The Fund is new and has a limited operating history. The Fund has a limited number of financial institutions that are authorized to purchase and redeem shares directly from the Fund; and there may be a limited number of market makers or other liquidity providers in the marketplace. These and other risks can be found in the prospectus.
Diversification does not assure a profit or protect against a loss.
The Fund is distributed by Foreside Fund Services, LLC.
Duration: a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.
S&P 500 Index: The S&P 500 Index is a market capitalization-weighted index of the 500 largest U.S. publicly traded companies.
Investing involves risk, including the potential loss of principal. There is no guarantee that the Fund’s investment strategy will be successful. Shares may trade at a premium or discount to their NAV in the secondary market. The Fund is new and has a limited operating history. The Fund has a limited number of financial institutions that are authorized to purchase and redeem shares directly from the Fund; and there may be a limited number of market makers or other liquidity providers in the marketplace.
Securities rated below investment grade are often referred to as high yield securities or “junk bonds.” Investments in lower rated corporate debt securities typically entail greater price volatility and principal and income risk. High yield securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities.
The Fund’s investments in bonds and other debt securities will change in value based on changes in interest rates. If rates rise, the value of these investments generally declines. Securities with greater interest rate sensitivity and longer maturities generally are subject to greater fluctuations in value. The Fund is considered to be non-diversified, which means that it may invest more of its assets in the securities of a single issuer or a smaller number of issuers than if it were a diversified fund.
The Fund is distributed by Foreside Fund Services, LLC.
1. Source: Sound Income Strategies. “Give Your Clients Sound Financial Guidance,” Brochure. 2021.
2. Source: cnbc.com, Aug. 5, 2021.
3. Source: The iShares iBoxx $ High Yield Corporate Bond ETF serves as the index, effective duration of 3.68 years, June 23, 2021.