The income investing environment has improved lately in terms of the yields you can capture on an investment, but that has come at the expense of negative total returns. What good is a 4-5% dividend yield if the investment loses 10%? Rob Isbitts, who runs ModernIncomeInvestor.com, believes he has an alternative strategy. He was a financial advisor for 27 years and has been charting stocks for more than 40. He joins the ETF Think Tank to discuss his process and how it can work for those in or near retirement.
The modern income approach focuses less on traditional dividend income investing and more on generating cash flow. Using a diversified portfolio of ETFs, the process involves taking gains off the table at a predetermined trigger point and using those gains as “income”. For example, when a $100 portfolio reaches a value of $102, the client withdraws the $2 and uses it however they see fit. This process then continues. The overall goal of modern income investing is to produce profits that can be withdrawn while maintaining the base value of the portfolio.
Isbitts says that the current environment has created challenges that have not been seen in years. How do investors approach things when equities and bonds aren’t doing what they are supposed to be doing at the same time? The modern income approach is more tactical. The model used involves investing in offense, defense, and wild cards at the same time, a strategy Isbitts calls “floating beta”. Using a combination of long and short positions, the approach has the ability to produce gains in all market cycles. In a way, Isbitts says it’s a lot like fantasy football where you choose different ETFs to fill out your roster.
Isbitts says it is a mistake to assume offense positions are high beta, such as equities, and defense positions are low beta, such as Treasury bills. He doesn’t want to be in a position where he is forced to be in equities. Some of the best offense is not putting forward offense. Sometimes, T-bills can show up as offense depending on conditions. You’d like to have something that works in any environment. The modern income portfolio often has a lot of success on big down days for the S&P 500 because there are a lot of hedges involved. Betting on the VIX can be a good one.
Other key takeaways:
- What about covered calls as an income strategy? Isbitts says that this is still an existing way to generate income. For the record, he has no issue with using fixed income, options, or other strategies for income. His approach takes a wide range of returns in equities/bonds and provides a narrower range of outcomes. Modern income can be additive, but probably not a replacement.
- The modern income strategy may sound like rapid portfolio rebalancing, but Isbitts says he is not a rebalancer. It’s tactical but has some characteristics that look similar. He calls it “low volatility total return with no cap”.
- If you are playing offense and defense at the same time, modern income can be inherently tax efficient.
- The wild cards are designed to have lower correlation with other assets but maintain high return potential. They are often highly active, thematic, or have little to no overlap with the broader market.
All investments involve risk, including possible loss of principal.
The material provided here is for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit. While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).