10 High-Yield ETFs That Stand Above the Rest
Dividend ETFs and Bond ETFs With High Yields
Investors looking for yield are looking for income from their investments. This income can be received in the form of dividends from stocks, or by interest payments from bonds. The term "high-yield funds" generally refers to mutual funds or exchange-traded funds (ETFs) that hold stocks that pay above-average dividends, bonds with above-average interest payments, or a combination of both.
Long-term investors typically look for growth in their portfolios over time, and most investors seeking high-yield funds are retired investors looking for income from their investments. Whether you're investing in high-yield mutual funds or high-yield ETFs, it's smart to have a clear purpose in mind for buying these income-oriented investments.
High-Yield ETFs vs. High-Yield Mutual Funds
The primary advantages of high-yield ETFs over high-yield mutual funds are low fees, diversification, and intraday liquidity. There is a variety of high-yield ETFs on the market compared to high-yield mutual funds. 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.
There's one primary drawback of high-yield ETFs, however. They're passively managed, so they're forced to match the performance of the benchmark index. This means a high-yield ETF manager is forced to trade in a down market, even at unfavorable prices.
This disadvantage also exists with index mutual funds. Managers are not able to navigate unfavorable market conditions by trading or holding at their discretion.
That said, this diverse selection of funds should suit a variety of investing needs. We've included ETFs that pay high yields, but we've also included those that balance diversification with an income objective.
If choosing to invest in high-yield ETFs, such as the ones we have highlighted, it's important to weigh what we like about them against what we don't like.
Variety of investment opportunities
Potential for income from investments
Broad range of specialized funds
Must match benchmark index
High risk because of associated junk bonds
Sensitivity to rising interest rates
Can be unpredictable
HYG should be on your radar if you're looking for one of the most widely traded high-yield bond ETFs on the market. The portfolio consists primarily of corporate bonds with maturities between three and 10 years, and 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 the highest.
The SEC Yield is 6.25% as of May 2020, and the expense ratio is 0.49% or $49 for every $10,000 invested.
Another highly traded ETF that invests in high-yield bonds is JNK, which had an SEC Yield of 6.85% as of May 2020 and an expense ratio of 0.40%. 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 three and 10 years.
Investors who want income through a low-cost ETF that holds dividend stocks should like VYM. This ETF tracks the FTSE High Dividend Yield Index, which consists of about 400 stocks of mostly large-cap companies that pay above-average dividends to investors. As of May 2020, the SEC Yield for VYM is 3.77% and the expenses are cheap at 0.06%.
Take a look at HYD if you have a taxable account and you're looking for a high-yield ETF. This one tracks the performance of the Bloomberg Barclays Municipal Custom High Yield Composite Index, which consists of U.S. high-yield, long-term, municipal bonds that 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.
As of May 2020, the SEC Yield for HYD is 5.01% and the expense ratio is 0.35%.
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. Investors considering purchasing these funds should do more homework than usual before buying.
The expense ratios of MLP funds can be high and sometimes difficult to understand, and these funds probably are best for investors looking for high yields, often as high as 7% or more. The expense ratio is 0.85%, which is low for an MLP fund.
Investors looking to diversify their high-yield holdings with foreign stocks, specifically emerging markets, might want to check out DEM. The fund management team attempts to find and hold the highest paying dividend stocks available in emerging markets. The expense ratio is 0.63%.
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 they're legally required to pay out at least 90% 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. REITs and other real estate securities. The SEC Yield is 4.19% and the expense ratio is 0.59% as of May 2020.
This fund is a rare breed in that it's one of just 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. As of May 2020, the SEC Yield for FPE is 5.29% and the expense ratio is 0.85%.
This high-yield ETF from Invesco is based on the KBW Nasdaq Financial Sector Dividend Yield Index, which consists of financial industry stocks that 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—they often hold large-cap stocks. The portfolio also is relatively concentrated with just 40 holdings. As of April 2020, the SEC Yield for KBWD is high at 12.76% and the expense ratio is also high at 1.58%.
Investors who want 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 was 5.26% as of May 2020, and the expense ratio is 0.25%.
Use Caution When Investing in High-Yield Funds
High yield often translates to high risk. Investors should keep in mind that high-yield funds often invest in bonds with low credit quality. These high-yield bonds also are called junk bonds.
High yields are attractive for income purposes, but the market risk on these bonds is similar to that of stocks. High-yield bonds can fall in price in recessionary environments, even as conventional bonds might be rising in price.
High-yield bond funds also might 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. When interest rates are rising, long-term bonds will generally fall more in price than short- and intermediate-term bonds.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.