The 10 Best High Yield ETFs
A Diverse Selection of Dividend ETFs and Bond ETFs With High Yields
If you're looking to buy one of the best high yield ETFs on the market, there are several different types of funds to consider.
Before you buy a high yield ETF, or any other type of investment, (even catastrophe bonds) it's smart to identify the purpose of the fund for your needs and how it will complement the other funds in your portfolio. Are you looking for high yields through dividends or from bond interest payments? Will you be investing in a taxable account or a tax-deferred account, such as an IRA? Are you looking for current income, long-term growth or both?
Why Invest in High Yield Funds
Whether you are investing in high yield mutual funds or high yield ETFs, it's smart to have a clear purpose for buying these income-oriented investments.
Investors looking for yield are typically looking for income from their investments. This income can be received in the form of dividends from stocks or by interest payments from bonds. Therefore, when some uses the term, "high yield funds," they are generally referring to mutual funds or ETFs that hold stocks that pay above-average dividends, bonds with above-average interest payments, or a combination of both.
Since long-term investors typically look for growth in their portfolios over time, most investors seeking high yield funds are retired investors looking for income from their investments.
High Yield ETFs vs. High Yield Mutual Funds
As with all ETFs, the primary advantages of high yield ETFs over their mutual fund counterparts are low fees, diversification and intra-day liquidity.
Also, there is a large variety of high yield ETFs on the market compared to high yield mutual funds. This means that investors have more opportunity to find yield in a variety of ways, which often leads to higher yields because of specialization within the ETF market.
However, there is one primary drawback of high yield ETFs: Since they are passively-managed, they are forced to match the performance of the benchmark index. In translation, in a down market, the high yield ETF manager is forced to trade, even at unfavorable prices. This disadvantage is also the same with index mutual funds. The manager is not able to navigate unfavorable market conditions by trading (or holding) at their discretion.
List of Best High Yield ETFs
In our list of the best high yield ETFs, we provide a diverse selection of funds to suit a variety of investing needs. While we include ETFs that pay high yields, we also include ETFs that balance diversification with their income objective.
So, in no particular order, here are 10 top high yield ETFs to buy on the market today:
- iShares iBoxx $ High Yield Corporate Bond (): If you're looking for one of the most widely traded high yield bond ETFs on the market, HYG should be on your radar. The portfolio consists primarily of corporate bonds with maturities between 3 and 10 years with credit quality below investment grade (a rating below BBB by Standard & Poor's or below Baa by Moody's credit rating agencies. AAA is highest). The SEC Yield is 4.74 percent and the expense ratio is 0.49 percent, or $49 for every $10,000 invested.
- SPDR Bloomberg Barclays High Yield Bond (): Another highly traded ETF that invests in high yield bonds is JNK, which has an SEC Yield of 4.95 percent and an expense ratio of 0.40 percent. As the ticker symbol suggests, JNK invests in bonds with credit quality below investment grade. The maturities average at intermediate-term, which is generally between 3 and 10 years.
- Vanguard High Dividend Yield (): Investors wanting to get income through a low-cost ETF that holds dividend stocks, will like VYM. This ETF tracks the FTSE High Dividend Yield Index, which consists of about 400 stocks of companies, most of which are large-caps, that pay above-average dividends to investors. The SEC Yield for VYM is 2.95 percent and the expenses are cheap at 0.08 percent.
- VanEck Vectors High-Yield Municipal Index (): If you have a taxable account, and your looking for a high yield ETF, you should take a look at HYD. This ETF tracks the performance of the Bloomberg Barclays Municipal Custom High Yield Composite Index, which consists of U.S. high-yield, long-term, municipal bonds, which offer tax-free income. This tax advantage can be especially attractive to investors in high tax brackets, which would translate into a high tax-effective yield for those investors. The SEC Yield for HYD is 4.03 percent and the expense ratio is 0.35 percent.
- Alerian MLP (): MLP funds invest in master limited partnerships, which typically focus on energy-related industries. MLP performance can be volatile and their structure as partnerships is more complex than stocks. So investors considering purchasing these funds should do more homework than usual before buying. With that said, MLP funds are probably best for investors looking for high yields, often as high as 7 percent or more. Also the expense ratios of MLP funds can be high and sometimes difficult to understand. The yield for AMLP is 10.68 percent and the expense ratio is 1.42 percent, which is low for an MLP fund.
- Wisdom Tree Emerging Markets High Dividend Fund (): Investors looking to diversify their high-yield holdings with foreign stocks, specifically emerging markets, may want to check out DEM. The fund management team attempts to find and hold the highest paying dividend stocks available in emerging markets. The distribution yield for DEM is 3.81 percent and the expense ratio is 063 percent.
- SPDR Dow Jones International Real Estate (): Investing in real estate with REIT sector funds can be a good way to get high yields for income purposes. REITs usually have at least 100 shareholders and REITs are legally required to pay out at least 90 percent of their income to shareholders. RWX tracks the Dow Jones Global ex-U.S. Select Real Estate Securities Index, which consists of non-U.S. REIT and other real estate securities. The SEC Yield is 2.95 percent and the expense ratio is 0.59 percent.
- First Trust Preferred Securities and Income (): This fund is a rare breed in that it is one of only a handful of ETFs that are actively-managed. The management team looks for income securities, such as corporate bonds at or below investment grade, preferred stocks, and convertible securities. The SEC Yield for FPE is 5.56 percent and the expense ratio is 0.85 percent.
- Powershares KBW High Dividend Yield Financial Portfolio (): This high-yield ETF from Invesco is based on the KBW Nasdaq Financial Sector Dividend Yield Index, which consists of financial industry stocks, which are known for their consistent dividends. Prospective shareholders should take note that this ETF focuses on small- and mid-cap stocks, which is not typical of most dividend funds which often hold large-cap stocks. The portfolio is also relatively concentrated with just 40 holdings. The SEC Yield for KBWD is high at 8.82 percent and the expense ratio is also high at 2.99 percent.
- Vanguard Emerging Markets Government Bond (): Investors wanting to find yield with a low-cost ETF that invests in emerging markets bonds will like what they see in Vanguard's VWOB. The fund tracks the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index, which consists of about 1,000 emerging markets bonds with an average duration of 6.4 years and credit quality mostly below investment grade. The SEC yield for VWOB is 4.09 percent and the expense ratio is 0.32 percent.
Cautions on Investing in High Yield Funds
High yield can often translate into high risk. Investors should keep in mind that high yield funds often invest in bonds with low credit quality. These high yield bonds are also called junk bonds. High yields are attractive for income purposes but the market risk on these bonds is similar to that of stocks. So, in recessionary environments, high-yield bonds can fall in price, even as conventional bonds may be rising in price.
High-yield bond funds may also hold long-term bonds, which have higher interest rate sensitivity than bonds with shorter maturities or duration. When interest rates are rising, bond prices are generally falling and the longer the maturity, the greater the sensitivity. Therefore, when interest rates are rising, long-term bonds will generally fall more in price than short- and intermediate-term bonds.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.