7 Ways to Increase Returns With Low Interest Rates

Boost returns despite lower interest rates.

The Federal Reserve lowered the federal funds rate level to near zero in mid-March of this year, affecting interest rates. When thinking about the effect that low interest rates have on investments, the impacts are mixed. Fixed-income investors dislike low interest rates because returns on bonds, certificates of deposit and savings accounts are low, leading to a diminished cash flow. But businesses and the stock market prefer low interest rates. With lower borrowing costs, companies can grow and expand more quickly leading to greater profits. Savvy investors understand that a diversified investment portfolio typically includes bond investments, but given the low interest rate environment, they may not be an attractive option right now. Here are a few ways to increase your returns and counteract the effect of low interest rates that depress returns on fixed assets.

Change your bank for higher returns.

Many investors ignore cash returns in their low-yielding savings account, with interest rates of less than 1%. For your cash on hand, having your money in a high-interest savings account that offers a higher yield than a traditional savings account could be a better option for managing your cash in the short term. These yields should be higher than the average bank savings account and more than the average money market fund yield of 0.5%, says Greg McBride, chief financial analyst at Bankrate.com. By simply searching for higher-yielding savings accounts, investors can easily increase cash account returns. Currently, online banks offer returns higher than the national average with Federal Deposit Insurance Corp. insurance up to $250,000 per depositor at an individual bank. While these returns aren’t immune to declines, bank savings account rates tend to hold up better than those of money market mutual funds.

Preferred securities offer the best of both stock and bond returns.

Preferred securities are hybrid investments that have fixed par values, or face value, and make scheduled coupon payments similar to bonds. They also carry credit ratings, have long or no maturity dates and might be callable or eligible for redemption by the issuer by a certain date. Preferred stockholders have a higher claim on dividends than common stockholders and a lower claim than a company’s bondholders. Similar to stocks, preferred shares aren’t required to repay the principal, but these securities come with two key risks: interest rate risk and credit risk. Investors taking a position in securities with higher yields must have a plan to manage their risk, says Josh Sailar, certified financial planner and partner at Blue Zone Wealth Advisors in Brentwood, California. In the case of preferred securities, “Investors need to think about their allocation to alternatives because they’re sensitive to interest rates and tend to react differently to market movements,” Sailar explains. Because of those risks, preferred securities offer higher relative yields than common stock or corporate bonds. One fund to consider: iShares Preferred and Income Securities ETF (ticker: PFF), which currently yields 5.32%.

Invest in real estate for higher returns.

When reaching for yield, beware of taking on too much risk, says Mark Painter, president at EverGuide Financial Group in New Jersey. He suggests yield-seeking investors look to real estate investments. Owning real estate for lease is a way to diversify and create long-term cash flow and capital appreciation for investors with cash for a down payment. Real estate investment trusts, known as REITs, offer higher returns for long-term retail investors saving for retirement through high dividend yields and capital appreciation. REITs can serve as a diversifier in your investment portfolio since it’s an uncorrelated asset to equities, for example. For broad-based real estate exposure, the Vanguard Real Estate Index Fund ETF (VNQ) owns a wide range of real estate and currently yields 3.8%. New real estate crowdfunding platforms such as Diversyfund, Fundrise and Groundfloor are expanding rapidly and offer more direct real estate investments.

CDs increase cash yields.

Don’t forget about bank CDs. These investments are FDIC-insured and are issued with terms from six months to approximately five years. Many banks offer promotions to secure new customers, and CDs can be a safer path to higher yields than stock dividends. While savers might worry about early withdrawal penalties, these are minimal. If a saver redeems the CD before maturity, the sacrifice is typically no more than three to six months of interest, a small price to pay for the higher yield. If you have liquidity risk, or you need to get access to your money, you want to pay attention to the length of maturity and go with a short-term CD, says Michael Loukas, principal and CEO of TrueMark Investments in Rosemont, Illinois. To get CDs that give you yield, your money needs to be tied up for a period of time. The consequence is you’re trading income levels for no risk, and if you don’t take risk, then you get low returns. This could be a short-term way to give you slightly higher returns than what’s available in a savings account or money market CDs, but it’s not going to be a solution in the long run.

Seek out high-income ETFs.

A search for high-income exchange-traded funds uncovers scores of funds with various holdings and investment strategies, offering dividend yields from 6% up to double digits. The structure of ETFs allows for some advantages, Loukas says. “You have a chance for capital appreciation, dividend growth, liquidity, a lot of characteristics of traditional equity investments. They tend to be less volatile than the broader market so you can achieve a bit of a higher yield and have a lower volatility profile overall than the broader market.” The iShares International Select Dividend ETF (IDV) offers exposure to high-quality international companies that have a proven record of high dividend distributions over time. A liquid asset that has high daily trading volume, IDV has a competitive expense ratio of 0.49% compared to its peers and offers exposure to a wide span of market sectors, countries and regions.

Discover undervalued high-yield securities.

Chasing yield can result in lower long-term returns and greater risk. A global perspective and the strong dollar may bode well for emerging-market government bonds. Steven Jon Kaplan, CEO at True Contrarian Investments in New York City, suggests investors look at undervalued bonds from countries such as Brazil, Colombia, Malaysia, Russia, China, India and Bangladesh. Most of these countries have never defaulted on their government-guaranteed bonds, Kaplan says. He recommends two ETFs: WisdomTree Emerging Markets Local Debt Fund (ELD), currently yielding 5.35%, and the iShares J.P. Morgan EM Local Currency Bond ETF (LEMB), yielding 4.71%. If the dollar falls in value against international currencies, these funds could offer capital gains on top of dividend payments.

Buck the crowd with emerging-market ETFs.

Continuing with a global view to investments, emerging-market economies have been advancing and could present some opportunities for higher-yielding investments. While U.S. stocks are trading at expensive valuations, these out-of-favor firms are selling at bargain prices. No one knows how long these shunned shares will remain unpopular, but it’s likely that at some point, they will revert to their mean returns providing patient investors with both capital appreciation and dividend income. “There are growth pockets in emerging markets, particularly that are viable when the U.S. is in a low rate environment. You can find elevated yields that you traditionally would in a domestic instrument, but you’re assuming higher risk, so that trade-off is something investors need to be aware of,” Loukas explains.

Seven ways to boost returns with low interest rates:

— Change your bank for higher returns.

— Preferred securities offer the best of both stock and bond returns.

— Invest in real estate for higher yields.

— CDs increase cash yields.

— Seek out high-income ETFs.

— Discover undervalued high-yield securities.

— Buck the crowd with emerging-market ETFs.

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7 Ways to Increase Returns With Low Interest Rates originally appeared on usnews.com

Update 10/06/20: This story was first published on a previous date and has been updated with new information.

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