Income ETFs with Strongest Charts

07/17/2012 10:45 am EST

Focus: ETFs

Thomas Aspray

, Professional Trader & Analyst

Tired of the very low yields in the Treasury markets? MoneyShow’s Tom Aspray suggests you take a look at these three income ETFs that can give you well-diversified exposure to some of the top dividend-paying stocks.

The yield on the ten-year Treasury Note closed Monday at a new low yield of 1.464%, which was just slightly below the June 1 low of 1.467%. This is a sign that many investors are still clearly nervous, opting for safety even if it means a negative total return.

Still, the stock market has held up surprisingly well. The last time yields were this low, the Spyder Trust (SPY) closed at $128.16, 5.4% below Monday’s close.

For those who do not have the resources or time to invest in individual stocks, the high-yield ETFs are an attractive alternative. All have low expense ratios and contain many of the stocks that I like individually on a technical basis. Several of these ETFs have very good-looking charts, and their relative performance suggests they are acting stronger then the S&P 500.

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Chart Analysis: The iShares High Dividend Equity Fund (HDV) has a current yield of 2.93% with an expense ratio of 0.4%. HDV tracks the Morningstar Dividend Yield Focus Index, which follows companies that have a consistent pattern of high dividends. So far in 2012, DHV has returned over 8%, assuming the reinvestment of dividends.

  • HDV has a high weighting in Health Care (29%) and Consumer Goods (24%), with 10% in AT&T (T), which is the largest holding. HDV has 7% in both Johnson & Johnson (JNJ) and Pfizer (PFE).
  • The weekly chart shows a well-established trading channel (lines a and b), with the upper boundaries currently at $62 or above current levels.
  • The RS analysis formed higher lows in March (line c) before moving back above its WMA.
  • The RS line has turned up and made new highs last week.
  • Volume spiked in mid-June, dropping the on-balance volume (OBV) below its WMA, but it did confirm the recent highs.
  • There is initial support now at $59.60, with stronger levels in the $58 to $58.50 area.

The Vanguard Dividend Yield ETF (VYM) has a current yield of 2.87% with a very low expense ratio of 0.13%. It concentrates on stocks with higher than average dividends, and so far in 2012 is up about 6.4%.

  • Consumer Staples is the largest sector, weighing at over 19%, followed by Industrials (13.7%), Energy (12.9%), and Health Care (12.1%)
  • Exxon Mobil (XOM) at just over 6% is the largest holding, followed by Microsoft (MSFT) at 4.2%, Chevron (CVX) at 3.4%, and General Electric (GE) at 3.3%.
  • The weekly chart shows a more than four-month trading range (lines e and f).
  • On a close above $49, the initial upside targets are $50 to $50.50, and then $53.
  • The RS analysis turned positive in early May, moving above its WMA.
  • The weekly OBV has turned up from its long-term uptrend (line h), after breaking its short-term downtrend (dashed line) in early July.
  • There is first support now at $47 to $47.40, and then in the $46.50 area.

NEXT: A High Yield ETF for Investors Bullish on Financials

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The iShares S&P US Preferred Index (PFF) has a current yield of 5.89%, and is the largest ETF in the preferred stock space. It has an expense ratio of 0.48% and is made up over 200 financial sector securities. It is up over 10% so far in 2012

  • There is only 16% concentrated in the top ten holdings, including securities of General Motors (GM), HSBC (HBC), Wells Fasrgo (WFC), and Citigroup (C).
  • PFF had a low of $37.23, and is now up 5.3% from its lows.
  • The weekly downtrend (line a) is in the $39.70 area, with prior highs at $40.15 and then $40.43.
  • The relative performance broke its multi-year downtrend (line b) in May,
  • Â and a move above the prior high will confirm that it has bottomed.
  • The weekly OBV broke out to the upside three weeks ago, overcoming resistance (line c).
  • The OBV shows a long-term uptrend (line d).

The daily chart shows that PFF has popped to the upside over the past two days, with first good support just below $39 (line e) and the rising 20-day EMA.

  • There is stronger support in the $38.50 to $38.75 area, and then at $38 to $37.74.
  • The daily RS line has moved back above its WMA, but is still in a short-term trading range. It has a long-term uptrend (line g).
  • A move in the RS above resistance (line f) will be a bullish sign.
  • The daily OBV looks very strong, as it surged through resistance (line h) in June.
  • Volume over the past few days has been strong, so look for a low-volume pullback.

What it Means: Even though these ETFs have done well this year, they are still an attractive alternative to individually accumulating a basket of large-cap, high-dividend stocks.

As I noted in the Week Ahead column, a higher close in the financial sector this week could confirm it as a market-leading sector. This could make the iShares S&P US Preferred Index (PFF) especially attractive.

How to Profit: For iShares S&P US Preferred Index (PFF), go 50% long at $38.94 and 50% long at $38.72, with a stop at $37.54 (risk of approx. 3.3%).

Alternatively, look at one of these based on which sector weighting you prefer:

For the iShares High Dividend Equity Fund (HDV), go 50% long at $59.52 and 50% long at $58.66, with a stop at $56.94 (risk of approx. 3.6%).

For the Vanguard Dividend Yield ETF (VYM), go 50% long at $47.74 and 50% long at $47.26, with a stop at $45.78 (risk of approx. 3.6%).

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