Sean O’Hara, President of Pacer ETF Distributors, joined Keith Black, Managing Director of RIA Channel, to discuss the impact of a higher-for-longer interest rate regime on equity investment styles.
Investors face threats from geopolitical risks and the fact that higher rates and inflation haven’t yet materially impacted corporate profits. Higher rates can threaten growth stocks by applying higher discount rates to earnings in distant future years, reducing the present value of those cash flows. Companies with high current free cash flow have the resources to deal better with higher levels of interest rates.
The Pacer Cash Cows ETFs® hold the stocks in each market index with the highest free cash flow yield. These stocks tend to have higher earnings growth and lower price-to-earnings multiples than the broader market. Energy stocks have the highest weight in The Pacer US Cash Cows 100 ETF (COWZ) and The Pacer Global Cash Cows Dividend ETF (GCOW) and the second highest sector weight in The Pacer Developed Markets International Cash Cows ETF (ICOW). Energy stocks have high free cash flow yield and are likely to be sensitive to increasing geopolitical tensions.
International and global stocks, such as those held in ICOW and GCOW, are trading at lower valuations than US stocks. Starting from lower valuation multiples, international stocks may be able to earn higher returns if and when the US dollar ends its strength relative to foreign currencies.
NOW ON DEMAND: WEBCAST – Covered Calls Aren’t The Only Way To Get Income From An Equity Portfolio
Covered call strategies excelled in the down market of 2022. However, during recent periods of market strength, covered call strategies historically have underperformed. These included the sharp rally in 2020, the extended rally in 2021, and the market recovery experienced in 2023. Fortunately, there are other ways to get income from an equity portfolio.
To be covered:
- Learn how you can select a dividend policy that’s right for your clients with a dividend multiplier strategy.
- Explore how income can be taxed more efficiently.
- Get insights into how other financial advisors are implementing this strategy in portfolios.
Accepted for 1 CFP® / IWI / CFA CE Credit
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