3 Income Funds To Hold In 2016

December 15, 2015 by

wall streetDavid Fabian:   Forecasting where the market will end up in 2016 is a very difficult task, as innumerable variables will intercede over the course of the next twelve months. The actions of the Federal Reserve in particular are going to be a heavy influence on income investors as they seek to position their portfolios for capital preservation and dependable dividend streams.

If 2015 has taught us anything it’s that there is a high degree of risk in individual high yield sectors such as master limited partnerships and junk bonds. These groups have erased years of accumulated gains in a manner of months as credit headwinds weigh on investors’ minds. In addition, the trendless direction of interest rates will likely lead to above-average volatility in high quality fixed-income holdings as well.

My top income themes for 2016 are centered around large, diversified, and proven investment vehicles that circumvent the hit-or-miss proposition of individual sectors. That may seem boring to those who like to tempt fate with the glory of a turnaround story or make assumptions in continued strength of momentum names.

Nevertheless, I think you will find these actively managed mutual funds and low-cost ETFs offer attractive characteristics as core holdings for nearly every style of income investor.

Vanguard High Dividend Yield ETF (VYM)

If you are looking for an essential equity income fund to own in 2016, then VYM should near the top of your list. This exchange-traded fund houses 435 U.S. stocks with characteristics of consistently high dividend yields. Top holdings include well-known names such as Microsoft Corp (MSFT), Exxon Mobil Corp (XOM), and General Electric Co (GE).

VYM has exposure to virtually every sector of the stock market, which means that it is a highly diversified and transparent investment vehicle. I like to think of this fund as the “S&P 500 of dividend stocks” because of its market-cap weighted structure and broad index construction methodology.

VYM

Currently VYM has a 30-day SEC yield of 3.25% and income is paid quarterly to shareholders. The embedded expense ratio of this fund is just 0.10% and it has over $11 billion in total assets.

I have owned this ETF as a core holding in my Strategic Income Portfolio for several years and expect that it will continue to add value in 2016 as well. It’s simply difficult to find a better investment vehicle for those that crave a low-cost, dividend-focused stock fund.

PIMCO Income Fund (PONDX)

Most bond investors have their core holdings in passive indexes such as the Vanguard Total Bond Market ETF (BND). However, in my opinion, an over allocation to a passive fixed-income basket may lead to weak performance over the course of the next several years.

One of my favorite actively managed bond funds to supplement or replace existing passive strategies is PONDX. This portfolio is governed by Daniel Ivascyn and Alfred Murata of PIMCO, who were named MorningStar’s 2013 U.S. Fixed-Income Managers Of The Year.

The PONDX strategy is built on the foundation of a flexible, multi-sector approach with the goal of income and long-term capital appreciation. It takes a global slant by incorporating themes from overseas markets and has been known to use hedges to control risk and limit interest rate sensitivity as well.   The effective duration of PONDX is just 3.09 years and it has a current 30-day SEC yield of 3.03%.

PONDX

This fund has an admittedly higher expense ratio than a comparable ETF at 0.79%. However, the performance over the last several years has well compensated investors for the superior security selection and risk management techniques.

PONDX has gained 2.81% versus 0.81% in BND on a year-to-date basis in 2015. Over the last three years, PONDX has returned 17.02% versus just 4.02% in BND. The fund is rated 5-stars by Morningstar and has been consistently ensconced in the top of its peer group over the last 3 and 5-years.

I own this fund in my own account alongside my clients and feel that the managers’ expertise navigating credit and interest rate volatility will make for a solid bond holding in 2016.

Note: Larger investors or those working with an advisor may benefit from the institutional share class PIMIX, which charges an expense ratio of 0.45%.

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