Investors who want yield are looking for income from their investments. This income can come in the form of dividends from stocks, or interest payments from bonds.
While long-term investors often look for growth in their portfolios over time, many of those who seek high-yield funds may be retired and looking for additional income.
Whether you're investing in high-yield mutual funds or high-yield ETFs, it's important to have a clear purpose in mind for buying these income-oriented investments.
High-Yield ETFs vs. High-Yield Mutual Funds
The biggest advantages of high-yield ETFs over high-yield mutual funds are low fees, diversification, and intraday liquidity.
There are many high-yield ETFs on the market compared to high-yield mutual funds. As an investor, you can find yield in a variety of ways, but there's one main drawback of high-yield ETFs: They're passively managed, so they're forced to match the performance of the benchmark index. That means that a high-yield ETF manager is forced to trade in a down market, even at unfavorable prices.
This problem also exists with index mutual funds. Managers cannot navigate poor market conditions by trading or holding as they wish. Nevertheless, this diverse selection of funds should suit a wide variety of investing needs. We've included ETFs that pay high yields, but we've also chosen to include those that balance diversification with an income objective.
If you choose to invest in high-yield ETFs, such as the ones we have listed, be sure to weigh what we like about them against what we don't like.
Variety of investment opportunities
Potential for income
Broad range of specialized funds
Must match benchmark index
High risk because of associated junk bonds
Sensitivity to rising interest rates
Can be unpredictable
1. iShares iBoxx $ High-Yield Corporate Bond (HYG)
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 mostly consists of corporate bonds, with maturities between three and 10 years. The bonds also have credit quality below investment grade, which means they have a rating below BBB by Standard & Poor's, or below Baa by Moody's. AAA is the highest rating.
The SEC Yield is 3.40% as of May 2021, and the expense ratio is 0.49%, or $49 for every $10,000 invested.
2. SPDR Bloomberg Barclays High-Yield Bond (JNK)
Another highly traded ETF that invests in high-yield bonds is JNK, which had an SEC Yield of 3.79% as of May 2021 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.
3. Vanguard High Dividend Yield (VYM)
If you want income through a low-cost ETF that holds dividend stocks, you 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 2021, the SEC Yield for VYM is 2.76%, and the expenses are cheap at 0.06%.
4. VanEck Vectors High-Yield Municipal Index (HYD)
Take a look at HYD if you have a taxable account and are 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 most attractive if you're in a high tax bracket, which would translate into a high tax-effective yield.
As of May 2020, the SEC Yield for HYD is 2.67%, and the expense ratio is 0.35%.
5. Alerian MLP (AMLP)
MLP funds invest in master limited partnerships, which often focus on energy-related industries. MLP performance can be volatile, and their structure as partnerships is more complex than those of corporations, which are owed as stocks. If you're considering buying these funds, you should do more homework than usual.
The expense ratios of MLP funds can be high and sometimes hard to understand. These funds are likely best if you're looking for high yields, often as high as 7% or more. The expense ratio is 0.85%, which is low for an MLP fund.
6. WisdomTree Emerging Markets High Dividend Fund (DEM)
If you're looking to diversify their high-yield holdings with foreign stocks, specifically emerging markets, you 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%.
7. SPDR Dow Jones International Real Estate (RWX)
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 by law they must pay out at least 90% of their income to their 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. As of May 2021, the SEC Yield is 2.24%, and the expense ratio is 0.59%.
8. First Trust Preferred Securities and Income (FPE)
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 2021, the SEC Yield for FPE is 3.78%, and the expense ratio is 0.85%.
9. Invesco KBW High Dividend Yield Financial Portfolio (KBWD)
This high-yield ETF from Invesco is based on the KBW Nasdaq Financial Sector Dividend Yield Index, which consists of financial 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 is also fairly concentrated, with just 40 holdings. As of May 2021, the SEC Yield for KBWD is high at 7.63%, and the expense ratio is also high at 1.24%.
10. Vanguard Emerging Markets Government Bond (VWOB)
If you want to find yield with a low-cost ETF that invests in emerging markets bonds, you'll like what you see in Vanguard's VWOB. The fund tracks the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index. The index consists of about 1,000 emerging markets bonds, with an average length of 6.4 years, and credit quality mostly below investment grade.
The SEC yield for VWOB was 3.80% as of May 2021, and the expense ratio is 0.25%.
Use Caution When Investing in High-Yield Funds
High yield often translates to high risk. 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 tempting for income purposes, but the market risk on these bonds is similar to that of stocks. High-yield bonds can fall in price even as conventional bonds are 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 lengths. When interest rates are rising, bond prices are often falling. The longer the maturity, the greater the sensitivity.
When interest rates are rising, long-term bonds often fall more in price than short- and intermediate-term bonds.
Frequently Asked Questions (FAQs)
What stocks are in the Vanguard High Dividend Yield ETF?
VYM's portfolio focuses on large-cap, value stocks with the heaviest weightings in financial, health care, and consumer staple sectors. There are more than 400 stocks included in the ETF, but some of the largest holdings are JPMorgan Chase, Johnson & Johnson, and Home Depot.
What's the highest yield you can safely get without taking on extra risk?
All investments carry some level of risk, including the potential loss of principal. Short-term Treasury bills are commonly considered the closest thing to "risk-free" investment available to investors. The higher the yield goes beyond the T-Bill, the less safe it gets. If the yield is higher than the average yield of an aggregate bond index, that means it likely carries more risk than the average bond.
What would cause a high-yield ETF to lose value?
The reason why a high-yield ETF loses value depends on the focus of the ETF. An ETF that holds bonds, for instance, would lose value if interest rates rise and push bond prices down. An ETF that holds stocks in companies will move up and down with the same supply and demand forces that move any other stock.
The Balance does not provide tax, investment, or financial services or 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.