Are you looking for a reasonable amount of income without exposing yourself to a lot of risk? If so, high-yield ETFs might be a better way to go than individual dividend-paying stocks.
The reason high-yield ETFs are attractive at this point in the economic cycle is that equities generally have become too expensive.
“It’s a strange environment that we’re in at the moment,” Schroders fixed income portfolio manager Neil Sutherland explained in November. “It’s a tug of war between expensive valuations on the one hand and weaker fundamentals, but it’s being offset by a huge amount of demand for U.S. fixed income assets from overseas buyers. So, it’s an uncomfortable equilibrium.”
Possible high-yield ETFs to buy so that you’re balancing risk with reward have less to do with corporate debt and stocks and more to do with consumer-related structured debt and assets.
Setting the bar at a yield of 2.5% or more, here are seven high-yield ETFs to buy now.
VanEck Vectors BDC Income ETF
Expense ratio: 9.62%
Back in March 2016, I recommended investors consider three business development companies (BDCs) to benefit from a segment of the market that was beaten down.
One of the BDCs was the VanEck Vectors BDC Income ETF (BIZD), a high-yield ETF that invests in other BDCs. Currently holding 25 stocks, BIZD has a 30-day SEC yield of 8.9%, providing plenty of income for those times when the share price corrects.
And they always correct. If you’re unfamiliar with BDCs, they tend to invest or lend money to businesses in need of growth capital. As a result, the interest rates charged to the companies taking the money tend to be higher.
While BDCs are considered higher risk, BIZD has been around since February 2013. Since the launch, VanEck has seen $227 million flow into the ETF, which isn’t bad considering a large segment of the investing public either don’t want any part of them or have never heard of them.
Since its inception, BIZD has delivered an annual total return of 5.5%, which isn’t spectacular, but it is nice to have when the equity markets correct.
I wouldn’t put more than 5% of your total portfolio in BIZD, but it is worth exploring more closely. Just keep in mind that the fees are high because they include the fees charged by each of the BDCs held by the fund. VanEck’s portion is only 0.47%.
Eaton Vance Global Income Builder NextShares
Expense ratio: 0.86%
While considered a high-yield ETF by many of the ETF databases available, the Eaton Vance Global Income Builder NextShares (EVGBC/IV) is a hybrid between an ETF and a mutual fund.
“NextShares are issued and redeemed only in specified large aggregations (“Creation Units”) and trade throughout the day on an exchange. Unlike ETFs, trading prices of NextShares are directly linked to the fund’s next end-of-day NAV rather than determined at the time of trade execution,” states EVGBC’s prospectus.
“Different from ETFs, NextShares do not offer opportunities to transact intraday at currently (versus end-of-day) determined prices. Unlike actively managed ETFs, NextShares are not required to disclose their full holdings on a daily basis thereby protecting fund investors against the potentially dilutive effects of other market participants front-running the fund’s trades.”
Those are a lot of words to say the fund is actively managed, invests in multiple asset classes including equities and fixed-income investments in the U.S. and elsewhere, and currently yields 2.5%.
As of Sept. 30, it had 31% of its $6.2 million in total net assets in U.S. equities, another 26% in foreign equities, 41% in fixed-income, and 2% in cash.
Take a look under the hood on this one. It’s better than it looks.
Global X SuperDividend U.S. ETF
Expense ratio: 0.45%
With so many complicated ETFs in the marketplace, it’s always nice to consider something more plain vanilla.
That’s not to say that the Global X SuperDividend U.S. ETF (DIV) is a terrible fund; quite the contrary. However, when your sole premise is to invest in 50 of the highest dividend-yielding U.S. equity securities, it’s hard to deliver the razzle-dazzle.
Not to worry. It’s more important that you generate income and capital appreciation safely and efficiently over the long haul than it is looking smart at the weekend cocktail party.
DIV’s current 30-day SEC yield is 8.2%. Yet its management expense ratio is a reasonable 0.45% annually. It seems you can have your cake and eat it, too.
Frankly, I’m surprised that DIV hasn’t gathered more than $548 million in total assets since its inception in March 2013, because its beta is way less than the S&P 500, providing investors with excellent downside protection relative to equities on the whole.
Some people don’t like equal-weighted ETFs. I think they’re an excellent way to capture a segment of the market without relying on the movement of one or two larger market caps.
iShares Emerging Markets High Yield Bond ETF
Expense ratio: 0.50%
I selected the iShares Emerging Markets High Yield Bond ETF (EMHY) for two reasons.
First, it never hurts to own a fund from the world’s largest provider of ETFs, because the fees are usually low-to-reasonable. Second, they generally tend to gather assets more quickly than some lesser-known providers.
I realize it’s only got $331 million in net assets even though it has been in existence for close to eight years. Still, it invests in U.S.-dollar denominated high-yield bonds issued by governments and corporations in emerging market countries.
It’s hard enough to get U.S. investors to wander out of their domestic comfort zone with stocks. It’s unrealistic to expect these same people to pour money into emerging market bonds. However, they should at least consider the idea.
Currently, EMHY yields an attractive 6% from 519 bonds, while charging an annual fee of 0.50%. Like many of the ETFs on this list, EMHY is more about defense than offense. And that’s a good thing sometimes.
First Trust Multi-Diversified Income Index Fund
Expense ratio: 0.71%
Earlier in 2019, I recommended the First Trust Multi-Diversified Income Index Fund (MDIV) for investors looking for some serious diversification.
However, MDIV is equally attractive for investors interested in investing in high-yield ETFs.
The $729 million in total net assets are invested in five different asset segments in equal 20% weightings: dividend-paying equities, REITs, high-yield bond ETFs, preferred shares, and master limited partnerships. With a 30-day SEC yield of 6%, it has managed to generate an annual total return of 5.02% since its inception in August 2012.
Although some would consider the ETFs 0.71% management expense ratio to be expensive, it’s important to remember that MDIV gives you five asset segments that aren’t correlated to each other. This means that if you throw in an S&P 500 index ETF and a large-cap international ETF, you’ve got a nicely diversified, easy to look after long-term investment portfolio. What’s not to like?
WisdomTree Global ex-U.S. Real Estate Fund
Expense ratio: 0.58%
One of only two real estate-focused ETFs in this article, I included the WisdomTree Global ex-U.S. Real Estate Fund (DRW) because it protects against home-country bias.
It also doesn’t hurt that it’s got an SEC 30-day yield of 3.6%, charges a reasonable 0.58% annually, and has more than $100 million in total net assets, an indication it probably won’t shut down anytime soon.
Although it hasn’t torn the ball of the cover since its inception in June 2007 — it’s got a 1.8% average annual return over the past 12 years — it appears to be getting a second life in 2019, up 16.5% year to date through Oct. 31.
The ETF’s top three segments of the real estate market by weighting include diversified real estate companies (21%), Retail REITs (18%), and Real Estate Development (17%). As for countries, Hong Kong (26%), Singapore (10%), and France (10%) make up the top three weightings.
Take a deep dive into DRW’s holdings. I think you’ll find you’re familiar with several of the companies held in its portfolio.
IQ US Real Estate Small Cap ETF
Expense ratio: 0.70%
Except for BIZD, the BDC ETF listed earlier, and the IQ US Real Estate Small Cap ETF (ROOF), the other five ETFs invest primarily in large-cap stocks or fixed-income investments.
In business since June 2011, ROOF tracks the performance of the IQ US Real Estate Small Cap Index, a collection of smaller real estate companies and REITs that have a minimum market cap of $100 million and average daily trading of $1 million.
Rebalanced quarterly, ROOF has a total of 77 holdings invested in the ETFs $67 million in total net assets. The top three weightings by sector are Specialized REITs (24%), Retail REITs (23%), and Diversified REITs (16%).
While the overlap in terms of the sectors between ROOF and DRW might seem like overkill, the two ETFs average market caps aren’t identical with ROOF at $2.0 billion and DRW more than three times higher at $7.7 billion.
Up 18.8% year-to-date, ROOF’s managed to keep up with its peers in 2019, if not blow them away. Oh, and it’s got a 30-day SEC yield of 4.9%.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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