The market environment has been very challenging for the income investors. Traditional income assets currently produce miniscule yields and some even fail to deliver above-inflation returns. Search for higher yields sometimes lures investors to risky assets.
Bonds had a terrible performance last year as investors ultimately realized that the three decade bull-market may be nearing its end. The situation changed earlier this year as many investors sought cover in “safety” of bonds due to emerging markets turmoil and concerns about the economic recovery.
However, the Fed will likely remain on taper track if the economy and the labor market continue to improve. Thus rates may begin to drift higher soon, resulting in losses for bond investors. High-yielding junk bonds in particular look very risky as of now.
Most high-yield stocks are from defensive sectors, which tend to underperform in a rising rate environment. (Read: 3 Energy ETFs to buy on Ukraine crisis)
High dividend yielding stocks can often indicate low future growth potential. Particularly if high dividend yield is a result of falling stock price, the stock may be risky and dividend may be unsustainable.
However, there are some unconventional asset classes and products that currently have high yield and a solid return potential.
Private Equity ETF—A Great way to profit from PE Market’s Strong Momentum
Private equity firms had a blockbuster year in 2013. Strong sentiment last year resulted in record fund flow with firms raising buyout funds totaling $143.5 billion last year, the highest level since 2008.
Outlook for this asset class remains positive, with improving global economy. Further, M&A and IPO activities remain robust.
If the stock market continues its uptrend and interest rates do not rise sharply, then the private equity market can maintain its positive momentum. Per CNBC, Tiger 21—a group of super-rich individuals (median net worth $75 million) sees private equity as the best opportunity in 2014.
Private equity also has a low correlation to the broader market and provides portfolio diversification.
While many investors are unfamiliar with this corner of the financial market, it is definitely worth a look due to its superior performance, positive outlook and low correlation with the stock market. (Read: Revenue Weighted ETFs keep crushing the market)
Private equity space is generally accessible only to super-rich and institutional investors but retail investors can access this space via an ETF.
PowerShares Global Listed Private Equity ETF (PSP) tracks the Red Rocks Global Listed Private Equity Index. The index is comprised of securities, ADRs and GDRs of 40 to 75 private equity companies.
Currently the fund has 64 holdings with U.S. PE firms accounting for about 40% of holdings, followed by UK and France at 18% and 9% respectively.