10 High-Yield ETFs for Income-Minded Investors
These high-yield ETFs show that there's no shortage of ways to balance risk and reward in the quest for better-than-average income.
Like all investing strategies, high-yield ETFs are a bit of a balancing act.
On one hand, stocks that deliver tremendous yield can be enticing because of "guaranteed" paydays that are two times, three times or even five times the typical dividend stock in the S&P 500.
But the truth is there are no guarantees on Wall Street. Firms that were very generous last quarter sometimes wind up cutting their dividends this quarter or seeing their shares tumble as a result of poor performance.
High-yield ETFs help you defray that risk somewhat by investing across dozens if not hundreds of individual issues. Nonetheless, it's always important to "pop the hood" and see how these funds fit in with your overall portfolio and your personal risk tolerance.
The following list of high-yield ETFs should provide you with a few examples of the alternatives that are out there, and how each strategy balances its risks with potential rewards. With the average yield of the Standard & Poor's 500 index at just under 1.6% at present, every one of these funds is well ahead of the game, with yields of at least 3.0% (but many that are much higher).
Data is as of March 4. Yields represent the trailing 12-month yield, which is a standard measure for equity funds, unless otherwise indicated
SPDR Portfolio S&P 500 High Dividend ETF
- Assets under management: $2.5 billion
- Dividend yield: 4.4%
- Expenses: 0.07%
For many income-oriented investors, the desire for yield also comes along with the desire to have continued exposure to the stock market. Those who want to be firmly rooted in equities but generate a bit more income than you'd get from the typical stocks on Wall Street should consider the SPDR Portfolio S&P 500 High Dividend ETF (SPYD, $37.57).
SPYD is about as straightforward as high-yield ETFs get. As the name implies, this fund is benchmarked to the S&P 500 index of the largest U.S. corporations, then screens out the stocks that don't offer large dividends. That means a portfolio of just 80 stocks at present, but also a yield that's roughly three times the broad index.
Perhaps unsurprisingly, that also means a significant change in the industry focus of this fund vs. broader index funds. Specifically, financials represent a little less than a quarter of the fund, followed by 19% in real estate. Top holdings at the moment include energy plays HollyFrontier (HFC) and ConocoPhillips (COP).
Invesco KBW High Dividend Yield Financial ETF
- Assets under management: $355.3 million
- Dividend yield: 8.2%
- Expenses: 1.24%
If you're really after yield and want some bias toward the financial sector – which you might amid rising rates at present – you might want to consider a focused bet on the sector.
"A simple way to play continued yield upside is to favor shorter duration equities over longer duration ones," says BCA Research. "This implies that investors should hedge against the steepening yield curve by favoring value equities over growth stocks, and the financial sector over tech."
You can get that kind of exposure via the Invesco KBW High Dividend Yield Financial ETF (KBWD, $18.65), which includes only financial stocks, and only the very highest dividend payers among them.
The list of holdings is pretty small and focused as a result of this tactical approach, with only about 40 total components in this ETF at present. The list of names may not be familiar, with top stocks including Prospect Capital (PSEC), a business development company (BDC), and Apollo Commercial Real Estate Finance (ARI), which operates mainly in the mortgage market.
There's obviously risk when you're focusing on a small list of stocks in a specific sector, but it also allows KBWD to be among the most generous high-yield ETFs, dwarfing yields of funds comprised of bigger-name dividend stocks.
Vanguard Real Estate ETF
- Assets under management: $33.7 billion
- Dividend yield: 3.8%
- Expenses: 0.12%
Another sector bet to consider alongside financials is real estate.
Real estate is perhaps one of the most reliable sources of income, as regular rent checks each month offer a regular stream of cash that can be returned to shareholders. And real estate investment trusts (REITs) are in fact required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
Vanguard Real Estate ETF (VNQ, $85.92) offers a deep lineup of some 180 stocks despite a sector-oriented approach, so you're getting a pretty diversified lineup. These include American Tower (AMT), which owns properties that host communications towers, or warehouse operator Prologis (PLD), proving these aren't just commercial real estate plays.
This portfolio offers up a yield of nearly 4% right now that's much more generous than most other straightforward sector funds that don't put a specific emphasis on yield, such as KBWD.
In the wake of the 2008 financial crisis, it should go without saying that real estate is not a risk-free sector. Putting all your eggs in this one basket could leave your portfolio exposed should similar troubles ever return to Wall Street. But it's undeniable that if you're hungry for yield, this is one of the best high-yield ETFs to explore.
Global X SuperDividend REIT ETF
- Assets under management: $414.3 million
- Dividend yield: 8.0%
- Expenses: 0.59%
Another real-estate focused fund worth calling out is Global X SuperDividend REIT ETF (SRET, $9.17). This ETF takes an even thinner slice of the stock market, with a focus on the highest-yielding real estate investments on Wall Street to create a curated list of about 30 total holdings that all offer tremendous paydays.
This list is split 60/40 regular REITs and mortgage REITs (mREITs), the latter of which deals specifically in paper rather than actual properties. They deal on the financing side of things and typically operate by borrowing a ton of cash, then lending it out at higher interest rates to profit handsomely from the spread. These include names Two Harbors (TWO) and Chimera Investment (CIM). More traditional real estate holdings include long-term specialist LTC Properties (LTC) and single-tenant net-lease REIT W.P. Carey (WPC).
When things go well, income-oriented investors will be thrilled. But keep in mind things don't always go well – mREITs especially have a tendency to cut dividends when times are tough.
Diversifying across the fund smooths out a little of that, but investors still should be aware of the potential for volatility that comes with this high-yield ETF.
iShares Global Energy ETF
- Assets under management: $1.4 billion
- Dividend yield: 4.1%
- Expenses: 0.46%
Though not as fashionable as financials or real estate, another sector that is typically much more generous when it comes to dividends is energy.
Sure, there is continued uncertainty for fossil fuel companies in the long-term as we look to a more sustainable global economy in the coming decades. But for older investors near retirement age, what happens over the next 20 or 30 years should not completely scare you off opportunities that could pay off nicely in the near-term – which, by the way, looks attractive right now.
"The global (energy) demand outlook has improved as the COVID-19 vaccine rollout has picked up speed recently and we get closer to a fully reopened economy," says Ryan Detrick, Chief Market Strategist for LPL Financial.
The iShares Global Energy ETF (IXC, $25.26) is a focused list of less than 60 big-name energy stocks, limited to the most established players, including Exxon Mobil (XOM), BP (BP) and other names you're undoubtedly familiar with. Some of these names were hit hard in early 2020 thanks to the big crash in oil prices but have recovered in recent months. This ETF in particular has enjoyed strong momentum over the past few months.
Once again, this is a sector bet, which means you're taking on additional risk by forgoing more diversified high-yield ETFs. But if you want to take a swing at energy and reap some income as well, IXC delivers.
Alerian MLP ETF
- Assets under management: $5.0 billion
- Dividend yield: 10.2%
- Expenses: 0.87%
Just as you can supercharge your income by focusing on a smaller but higher-yield subsector of real-estate, investors can also supercharge their income with this focused energy fund.
The Alerian MLP ETF (AMLP, $31.24) invests in what are commonly known as master limited partnerships, or MLPs. These are special stocks that operate with a favorable tax structure thanks to the capital-intensive nature of their businesses, which commonly include energy storage and transportation.
Top holdings of AMLP include Energy Transfer LP (ET) and Plains All American Pipeline LP (PAA) – so-called "midstream" energy stocks because they neither drill new wells for energy or market finished products. Instead, these businesses just transport oil and gas via pipelines, store it in tanks and terminals, and otherwise connect the explorers with end-users and refineries.
Though more focused than a broad energy fund, in some way this business model is a bit less risky as it doesn't involve as much exposure to market prices for crude oil or natural gas as exploration-and-production firms. These MLPs tend to charge based on the volume they are moving or storing, so demand is important, but it avoids other outside factors affecting energy prices.
Amplify High Income ETF
- Assets under management: $312.2 million
- Dividend yield: 9.6%
- Expenses: 2.17%
First things first: This Amplify fund not only charges the greatest fee of the high-yield ETFs listed here, but it's one of the most expensive ETFs you'll find on Wall Street.
That said, it seemingly pays for itself via a high-yield strategy that delivers tremendous income – one that's very hard for the typical retail investor to independently replicate.
Specifically, the Amplify High Income ETF (YYY, $16.37) is a fund comprised of 30 other investment funds. That obviously adds an extra layer to fees, which is part of the reason the expenses are so high. However, if you are looking for a single holding to manage a wide array of high-yield investments so you don't have to, YYY is worth a look.
This ETF is comprised of 30 closed-end funds (CEFs), which actually trade more like stocks than ETFs in that they have a fixed number of shares. They also have other aces up their sleeve, such as being able to use debt leverage to double down on their investment theses. The current lineup of holdings includes tactical funds such as the BlackRock Resources & Commodities Strategy Trust (BCX) and the NexPoint Strategic Opportunities Fund (NHF).
Researching closed-end funds is no easy task, but YYY does the legwork for you to offer up a menu of high-yield opportunities it expects to do well. This is definitely a niche play, but is worth researching if you want alternative assets for income instead of mainstream bonds or dividend stocks.
iShares Broad USD High Yield Corporate Bond ETF
- Assets under management: $7.6 billion
- SEC yield: 4.0%*
- Expenses: 0.15%, or $15 annually on every $10,000 invested
When most investors think about fixed-income strategies, they first think about the bond market. Unfortunately, bonds haven't been particularly generous in recent years thanks to an environment with chronically low interest rates. Even after a recent boom in yields, a 10-year U.S. Treasury bond still only offers a meager 1.55%.
To access higher yield, then, investors need to take on a bit more risk by looking beyond rock-solid government bonds and into the corporate sector, where loans extended to less-than-perfect companies can still command significant interest rates.
That's what iShares Broad USD High Yield Corporate Bond ETF (USHY, $40.89) – by focusing on high yield bonds, or "junk" bonds, in common parlance – can achieve.
USHY has a higher risk profile, to be sure, but it is a well-established fund with more than 2,000 individual bonds in its portfolio to ensure a good measure of diversification. Current positions include a juicy 11.5% loan to embattled cruise ship operator Carnival (CCL) and a loan to telecom T-Mobile US (TMUS) at 7.9%. Those are good examples of how bond offerings to less-stable corporations can command big-time yield.
* SEC yield reflects the interest earned after deducting fund expenses for the most recent 30-day period and is a standard measure for bond and preferred-stock funds.
Vanguard Emerging Markets Government Bond
- Assets under management: $2.7 billion
- SEC yield: 3.5%
- Expenses: 0.25%
If you'd rather not rely on struggling U.S. corporations, Vanguard Emerging Markets Government Bond (VWOB, $77.46) offers a decent alternative in the high-yield bond marketplace.
As the name implies, this fund targets sovereign debt of emerging market economies. That means that while there is a measure of certainty here, as all governments have a powerful revenue-generating tool in the ability to increase taxes, there is more risk and volatility than you'd see in established western economies.
Like the aforementioned corporate junk bond fund, VWOB looks to offset some of this risk through a deep and diversified array of some 760 sovereign debt holdings across nations like Qatar, Russia and Argentina. The fund also includes bond offerings to state-run outfits like oil giant Petroleos Mexicanos that are a bit more stable than traditional private firms, as they have government backing to keep them afloat if things get tough.
Global X U.S. Preferred ETF
- Assets under management: $1.3 billion
- SEC yield: 5.1%
- Expenses: 0.23%
A sort of hybrid between stocks and bonds, preferred stock is far more stable in its share price than traditional common stock but tends to offer far higher yields than corporate bonds from the same entity.
The downside, of course, is that stability means you don't participate in the upside of common shares during a big rally like the one we saw across the end of last year. And while the yield is nice, preferred stock still is subordinate to traditional bonds in bankruptcy proceedings, so you could see significant losses in the event of default.
In a diversified income portfolio, however, preferred stock could fit in nicely. These shares aren't easy for individual investors to buy directly, but the Global X U.S. Preferred ETF (PFFD, $24.88) provides a simple one-stop shop for you to add a layer of preferreds to your holdings.
The portfolio is biased toward capital-intensive sectors that need to constantly raise money, such as utility stocks with high ongoing maintenance costs or financials that need deep pockets to fund multinational lending and investment operations of their own. However, with nearly 300 preferred stock holdings across established firms such as NextEra Energy (NEE) and Bank of America (BAC), there is a measure of stability despite a focus on a narrow part of the market.