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High Yield ETFs Every Investor Should Own

April 21st, 2014

yieldMarshall Hargrave: Stock market volatility is sending some investors in search of safer investments. Tech stocks in particular have been falling, with the Nasdaq dropping more than 5% in the last month.

For most investors, “safety” means two things: 1) income, and 2) diversification.

One of the best investments for earning high yields and diversifying your portfolio are ETFs. Like mutual funds, ETFs often invest in more than 100 securities. That means that ETF investors immediately get diversified exposure to all of the investments in the fund. Plus, these funds typically charge lower fees than mutual funds.

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My Top Three High Yield ETFs 

iShares S&P US Preferred Stock ETF (NYSEARCA:PFF)

The beauty of this preferred ETF is that they pay distributions monthly. So instead of the quarterly income you’re used to from dividend paying stocks, you’ll be getting paid every month.

Preferred stocks is perfect for income investors. These are hybrid securities that have bond- and stock-like qualities. The nice thing about preferred stock is that it is senior to common stock. That means that owners of preferred stock get paid before common stock holders if things go south.

Two of the other major preferred ETFs that pay a 6% plus yield are PowerShares Financial Preferred Portfolio ETF (NYSEARCA: PGF) and PowerShares Preferred ETF (NYSEARCA: PGX). Both have distribution yields right at 6.3%.

All of these ETFs have over 90% of their portfolio invested in financial companies, namely banks. They have very similar holdings, with each ETF having a heavy mix of HSBC, Barclays, Wells Fargo. PNC Financial and BB&T. They all also tend to be heavily concentrated in developed markets, including over 50% exposure to countries other than the U.S.

But what makes iShares S&P US Preferred Stock ETF the best?

It has the highest distribution yield at 6.6%, and the lowest expense ratio at only 0.48%. It’s also the largest preferred stock ETF available to investors. The expense ratio is the annual fee that all mutual funds or ETFs charge their shareholders.

The great attributes of preferred stock doesn’t come without caveats. The one downside for preferred ETFs is that they are interest rate sensitive. Like bonds, preferred stocks become less attractive in a rising interest rate environment, where the price of preferred stock falls as rates rise.

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NASDAQ:IFGL, NYSE:DWX, NYSE:PFF


 

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