Yesterday I went to the IndexUniverse ETF conference in NYC for an all day meeting on ETFs. This further convinced me that ETFs and more specifically, tactically managed ETF portfolios are the wave of the future. There were a lot of great speakers and I came back with some good ideas but one issue that was on the mind of the presenters and the audience was where to get yield in this environment. The consensus was that the bond market will eventually implode (something I always like to remind people who have only experienced a bull market in bonds during their investing lives) but it won’t happen tomorrow. But there was no good answer on where to get yield with 10 year Treasuries under 1.75%-that is of course because you are not getting paid for the risk you would have to take in any bond market.
On the surface this seems like a good question and a valid concern but it really isn’t. There are three potential sources of return when you invest—dividends, interest, and capital gains. If we ignore for a moment the tax implications of each (partly because we don’t know what they are going to be) it doesn’t really matter where return comes from as long as it comes. Focusing entirely on yield—dividends and interest, in a low yield environment, forces investors to take way too much risk. A tactical approach is a much better idea as there are times to focus on yield and times to focus on capital gains. In an environment where the Fed is manipulating interest rates to keep them low for the foreseeable future then capital gains is really the only game in town when it comes to generating returns.
Unfortunately, it is not as simple as just buying stocks and holding them. Everyone is predicting low stock returns out into the future. Ignore for a moment the fact that Wall Street has a poor track record of predicting anything and assume that this is true. Does that mean that stocks just won’t move? No, it means we will have some up years and some down years and net/net we will end up pretty close to where we started. For a buy and hold investor that is a disaster. For a tactical investor who can stay in harmony with market trends it creates a ton of opportunity to generate returns.
What if on the other hand we are on the verge of a great bull market (which, after we get through this deleveraging period I think is highly likely)? Then both tactical and buy and hold will generate capital gains, tactical will just do it with less risk.
So the question should never be—where do I get yield? The right question is always—where do I get total return?