Eric Dutram: U.S. Treasuries’ yields are still hovering near their lows, leaving the investors to look for alternative sources of current income. As a result, some of the products providing high yields such as high yield bonds, high dividend equities and preferred shares as well as related ETFs have become the popular source of current income among income investors.
Below we present some of the ETFs that provide the extra yield that the yield-starved investors search for in current ultra-low interest environment.
Preferred Stock ETFs
Investors seeking for a stable and steady source of income in this uncertain economic environment can look to invest in preferred stock ETFs. Preferred shares are hybrid instrument which boast the traits of both equity as well as fixed income bonds. These shares are mostly issued by financial, telecommunication and utility companies. (Complete Guide to Preferred Stock ETF Investing)
Preferred shares get preference over equity shares in terms of dividend payment and priority in payment in the event of bankruptcy of a company. Preferred stock ETF carry a fixed rate of dividend so that income starved investors can be assured of the current income when investing in these ETFs. Many of these ETFs are now yielding 6%–7%.
We would like to highlight four preferred share ETFs that are available to U.S. investors who are willing to invest in this slice of the market. (Are Preferred Stock ETFs Worth the Risk?)
SPDR Wells Fargo Preferred Stock (NYSEARCA:PSK)
PSK tracks the pre-expenses price and yield performance of Wells Fargo Hybrid and Preferred Securities Aggregate Index. This fund has a total asset base of $298.7 million and holdings of 136 shares. The ETF currently has a yield of 6.12% while it charges 45 basis points annually for expenses. (11 Great Dividend ETFs)
Among 136 constituents, 82.67% are from the family of preferred shares while the rest are either equity shares or bonds. The fund also appears to be non-biased towards the top 10 holdings as just 20% of the assets go towards them. Among the top 10 holdings, Barclays Bank Plc is the first preferred holding while among others the fund has not invested more than 2.27%.
The fund has delivered a return of 5.78% over a period of one year.
PowerShares Preferred ETF (NYSEARCA:PGX)
This ETF tracks the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index. The Index has been designed to reflect the total return performance of the U.S. dollar-denominated preferred securities market. The fund has a yield of 6.26%, while it charges 49 basis points annually for expenses.
The fund’s total asset base of $1,970.6 million is spread out among 149 holdings. The fund is also protected from company-specific risk as just 32.6% of the assets are invested in the top 10 holdings.
Among individual holdings, Citigroup Capital, Wells Fargo & Company PFD and Barclays BK PLC get the top three preferreds.
PowerShares Financial Preferred ETF (NYSEARCA:PGF)
PGF seeks to replicate the Wells Fargo Hybrid & Preferred Securities Financial Index which has been designed to track the performance of preferred securities issued by financial institutions in the U.S. markets. This preferred ETF has a yield of 5.84%, somewhat lower than the other two in the list but still quite impressive. (Market Vectors Debuts Preferred ex Financials ETF (PFXF))
The fund’s exposure to holdings is also limited to 55 stocks, comparatively a small basket than PGX and PSK. The fund appears to be moderately spread out among its constituents as just 44% of the asset base goes towards the top 10 holdings. HSBC Holdings gets the highest allocation in the fund followed by Bank of America and ING Groep NV PFD.
Investment in this fund may prove to be somewhat expensive in the list as the cost comes in at 66 basis points annually.
iShares S&P U.S. Preferred Stock ETF (NYSEARCA:PFF)
For a broader exposure in preferred stock investing, investors can consider PFF, which is not only rich in asset base, but also trades at high volume levels.
The fund has an attractive dividend yield of 5.74%, while as it charges a fee of 49 basis points, which is 1 basis point lower than the category average.
The asset base of $10,073.7 million is invested in a holding of 267 stocks, with each holding not exceeding 2.58% of the assets. Thus, company-specific risk is very low in this fund.
High Yield Bond ETFs
Fixed income investment plays a very important role in any investor portfolio especially at times of a floundering economy. As interest rates have hit rock bottom, many investors are looking for fixed income investments that provide a high yield compared with the more popular and ‘safer’ fixed income instruments.
In this context, high yield bond ETFs have gained immense popularity thereby attracting the attention of investors. Additionally, investing in individual high yield bonds may involve higher risk and volatility compared to investment in high yield bond ETFs (Seven Biggest Bond ETFs by Assets under Management).
We have highlighted four high yield bond ETFs that could help the investor to boost their current income by allocating a portion of the asset to this asset class.
iBoxx $ High Yield Corporate Bond Fund (NYSEARCA:HYG)
When it comes to junk bond investing, then HYG is most popular ETF among the investors. In this uncertain economic scenario, HYG provides an impressive yield of 6.56% and as a result, it has been able to amass $16,598.7 million in asset base. (Top Four High Yield Bond ETFs).
The fund holds 662 corporate junk bonds with double-digit allocation to Consumer Staples, Oil & Gas, Financials and Telecommunication.
HYG’s average yield to maturity stands at 5.74% with an effective duration of 3.85 years while the coupon rate comes in at 7.78%. HYG charges a fee of 50 basis points annually which is just 1 basis point higher than the category average.
SPDR Barclays Capital High Yield Bond ETF (NYSEARCA:JNK)
JNK is also very popular among investors seeking to invest in junk bonds. The ETF has $12,246.5 million in assets under management which it allocates to a portfolio of 243 bonds.
The fund has a yield of 6.95% which is higher than what is offered by HYG. Also, the fund is more heavily traded than its iShares counterpart. Additionally, JNK has an edge in expenses, charging 40 basis points, which is not only lower than HYG but also on the lower side of the category average.
With an effective duration of 4.2 years, the fund’s yield to maturity stands at 6.6%.
PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSEARCA:PHB)
PHB’s weightings’ determination for securities makes it different from JNK and HYG as this ETF takes into consideration certain fundamental factors before including securities in its holding list. With this methodology, the ETF aims to provide exposure to those junk bond issuers which are of high quality and low debt level.(Three Outperforming Active ETFs)
With lower risk comes a somewhat lower yield. So, investors who desire to curtail the credit risk in their portfolio simultaneously seeking a decent yield can invest in this ETF. The yield of the ETF stands at 5.00%, which is lower than what JNK and HYG offer; however, it is quite impressive considering the Treasury Bonds yield. (Top Three High Yield Junk Bond ETFs)
The fund is home to 216 junk bonds with 97% exposure to corporate bonds while the top 10 holdings just have a share of 14.3% which signifies less company-specific risk.
The fund has a tilt towards consumer discretionary in which the total exposure stands at 26.5% while energy and financial sectors also have double-digit allocation. (For Financials, Look to These Top Zacks Ranked ETFs)
The fund has an effective duration of 3.93 years, while the average yield to maturity and average coupon rate are 5.30% and 7.27%, respectively. The cost to the investors for investment in this fund stands at 50 basis points annually.
Peritus High Yield ETF (NYSEARCA:HYLD)
For a more active approach to junk bond ETF investing, investment in HYLD from AdvisorShares can be considered. (AdvisorShares Planning New Active Income ETF)
The fund has a minimal focus on high leveraged buyouts and uses a ‘Hedged HY’ strategy which enables it to shift to .S. T-Bills whenever there is pressure on the lower quality debt, a feature unique to the fund.
The fund also provides an impressive yield of 9.08% to the investors but the investors are charged 1.36% for investing in the fund.
The fund provides exposure to 37 junk corporate bonds and has a lower effective duration of 3.54 years and a higher yield to maturity of 10.9%.
High Yield Dividend ETFs
Many investors seeking current income have eventually shifted their focus to dividend paying stocks or dividend ETFs.
High dividend paying stocks play their defensive role and provide decent returns to the investor when the market tends to be volatile. (Can You Beat These High Dividend ETFs)
With this backdrop and an increased focus on yield by many investors, we have highlighted four funds below which have high payout yields.
Global X SuperDividend ETF (NYSEARCA:SDIV)
For a global exposure to the ETF space, investors can invest in Global X’s SDIV. The fund tracks the price and performance of the Solactive Global SuperDividend Index, thereby giving investors an option to target dividend paying stocks on a global basis.
With asset under management of $122.4 million, this fund provides an attractive dividend yield of 7.76%. (Inside The SuperDividend ETF)
SDIV has an edge in expenses as it charges an expense ratio of 58 basis points, the lowest on the list.
The ETF provides exposure to 101 high dividend yielding stocks while around 12.9% of which make up the top 10 holdings. Among sector holdings, real estate, financials and telecommunication receive the highest allocation, collectively comprising 58.9% of its asset base. (The Introductory Guide to Real Estate ETF Investing)
Guggenheim S&P Global Dividend Opportunities Index ETF (NYSEARCA:LVL)
Guggenheim’s LVL is another global fund with a high yield. The product tracks the S&P Global Dividend Opportunities NR Index, which consists of 100 stocks and ADRs that have at least $1 billion in market cap and are also high yielders. The fund provides a yield of 6.66%.
The product’s assets are pretty well spread out with large caps making 33.2% of the asset base while mid and small caps accounting for 63.4% of the portfolio. Among individual holdings also, the fund does not appear to be much concentrated in the top 10 where 32.8% of the asset base is invested.
Among sector holdings dividend focused ETFs are generally inclined towards telecommunication and financials, and LVL is not an exception. The fund charges investors 60 basis points annually.
First Trust Dow Jones Global Select Dividend Index (NYSEARCA:FGD)
FGD is another high yield dividend fund with a global focus. The product tracks the Dow Jones Global Select Dividend Index which looks to give exposure to about 100 stocks across a variety of markets around the globe.
The ETF focuses on companies that have a current year dividend-per-share greater than the trailing five-year annual average while payout ratios must be less than 60% for American and European securities. By doing this, investors could gain exposure to a group of companies that are increasing their payouts but still have a nice buffer of safety. (Three Excellent Dividend ETFs for Safety and Income)
The fund has a dividend yield of 5.1%, a good level considering the focus of the fund. The fund manages an asset base of $204 million which it invests in a basket of 100 dividend paying stocks. Of this, 17.8% is invested in the top 10 holdings.
Like many other dividend focused funds, FGD also has a tilt towards telecommunication, financials, and utilities with a total asset investment of approximately 51.5%. The fund charges an expense ratio of 60 basis points annually.
Dow Jones International Select Dividend Index Fund (NYSEARCA:IDV)
For another global fund with a high yield, investors also have iShares’ IDV to consider. The product tracks the Dow Jones EPAC Select Dividend Index, which consists of 101 stocks that have provided relatively in one hundred of the high dividend yields on a consistent basis over time. The fund produces a yield of 4.98% on a 30-day SEC yield basis.
The product’s assets are pretty well spread out with large caps making 64.1% of the asset base while mid and small caps accounting for 35.3% of the portfolio. Among individual holdings also, the fund does not appear to be concentrated in the top 10 as just 28.4% of the asset base is invested.
For sectors, financials accounts for 21.2% of the total, while consumer staples and utility stocks round out the top three. Region exposure is tilted towards Europe in the top spot
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