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03/04/21 | Stacey Morris

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How can investors play the reflation trade within the equity income space?

The reflation trade remains in focus given positive expectations for economic growth and ongoing inflation concerns with bond yields rising. The 10-year Treasury yield settled at a high of 1.52% on February 25 – the highest level seen since February 2020. Last week, Fed Chair Jerome Powell outlined the case for continued easy monetary policy, noting that inflation and employment remain well short of the Fed’s targets. How can income investors play the reflation trade?

After a tumultuous 2020, energy has been the top-performing sector in 2021, boosted by the reflation trade and a 26.75% increase in benchmark US oil prices year-to-date through February. For income-seeking investors, MLPs and midstream offer attractive income and stand to benefit from a continuation of the reflation trade given their energy exposure. MLPs and broader midstream have gained 14.07% and 12.08% on a total-return basis this year through February, respectively.

For those wanting exposure to the reflation trade with greater diversification, the equal weighting of the S-Network Sector Dividend Dogs Index (SDOGX) results in overweight exposure to energy compared to other broad market indexes. Year-to-date through February, SDOGX has outperformed the S&P 500 by 600 basis points on a total-return basis while boasting a yield 300 basis points higher than the S&P 500 as of the end of February.

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Current Yields vs. History

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Midstream and MLPs continue to offer current yields above historical five- and ten-year averages even after a strong start to the year.

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Among the Sector Dividend Dogs, SDOGX stands out for solid year-to-date performance and a current yield slightly above the five-year average.

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Closed-end funds continue to represent an attractive option for income. The smart-beta approach of CEFX capitalizes on NAV discounts to further enhance yield.

Related Research:
4Q20 Midstream/MLP Dividend Recap: Steady Improvement Continues  

A Smarter Approach to Closed-End Funds

Dog Days of COVID-19: Evaluating the Case for Equity Income with SDOGX



Underlying Index

Associated Product

Midstream/MLPs

Alerian Midstream Energy Index (AMNA)

ETRACS Alerian Midstream Energy Index ETN (AMNA)

Alerian MLP Index (AMZ)

JP Morgan Alerian MLP Index ETN (AMJ), ETRACS Alerian MLP Index ETN Series B (AMUB, ETRACS Quarterly Pay 1.5X Levered Alerian MLP Index ETN (MLPR)

Alerian Midstream Energy Dividend Index (AEDW)

ETRACS Alerian Midstream Energy High Dividend Index ETN (AMND), Alerian Midstream Energy Dividend UCITS ETF (MMLP)

Alerian MLP Infrastructure Index (AMZI)

Alerian MLP ETF (AMLP), ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB)

Alerian Midstream Energy Select Index (AMEI)

Alerian Energy Infrastructure ETF (ENFR)

Sector Dividend Dogs

S-Network Sector Dividend Dogs Index (SDOGX)

ALPS Sector Dividend Dogs ETF (SDOG)

S-Network International Sector Dividend Dogs Index (IDOGX)

ALPS International Sector Dividend Dogs ETF (IDOG)

S-Network Emerging Sector Dividend Dogs Index (EDOGX)

ALPS Emerging Sector Dividend Dogs ETF (EDOG)

S-Network REIT Dividend Dogs Index (RDOGX)

ALPS REIT Dividend Dogs ETF (RDOG)

Closed-End Funds

S-Network Composite Closed-End Fund Index (CEFX)

Invesco CEF Income Composite ETF (PCEF),   ETRACS 1.5X Leveraged Closed-End Fund ETN (CEFD)

S-Network Municipal Bond Closed-End Fund Index (CEFMX)

VanEck Vectors CEF Municipal Income ETF (XMPT)

 

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