Don’t chase shady stocks.
In their quest for high yield, investors often find themselves chasing after questionable stocks. In some cases, a high yield is a result of a battered share price; in others, it’s compensating for higher risk or utter lack of growth prospects. Many times, there’s a serious single-stock risk of collapse, a dividend cut/suspension or both. Exchange-traded funds help investors mitigate this risk by investing in dozens, if not hundreds of rich, income-producing assets, be it stocks, bonds or other assets, such as preferred shares.
Vanguard REIT ETF (ticker: VNQ)
Vanguard’s VNQ is the gold standard of ETFs investing in real estate investment trusts, a type of company that owns and/or operates real estate properties, and pays out at least 90 percent of their taxable income as dividends in exchange for hefty tax benefits. As a result, REITs tend to be one of the higher-yielding asset classes on the market. VNQ specifically holds 157 REITs, most heavily in the retail and residential spaces, including Simon Property Group (SPG) and Public Storage (PSA).
Dividend yield: 4.5 percent
Expenses: 0.12 percent, or $12 annually per $10,000 invested
VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)
Most investors are aware of the income appeal of junk bonds, but likely aren’t aware of “fallen angel” bonds — previously investment-grade bonds that have been downgraded to junk status. These bonds typically are on the high end of the junk-quality spectrum, and to wit, more than three-quarters of ANGL’s holdings are rated BB — the highest non-investment-grade rating — with another 17 percent just a step below at B. Top holdings include bonds from Japan communications giant Softbank Group and U.S. telcom company Sprint Corp. (S). ANGL is a suitable investment for someone looking for a middle ground between investment-grade and junk.
Dividend yield: 4.9 percent
Expenses: 0.35 percent (includes 30-basis-point fee waiver)
VanEck Vectors Preferred Securities ex Financials ETF (PFXF)
Preferred stocks are high-yield “hybrids” that share traits of both stocks and bonds; for instance, they trade on an exchange like a stock, but pay out a fixed dividend, much like a bond’s coupon. While there are a number of wide-ranging preferred ETFs on the market, the PFXF is attractive for a number of reasons. For one, it excludes preferreds of bank and other financial companies, as these were among the most at-risk preferred shares during the financial crisis. But even if you’re OK with banks, PFXF still offers a strong mix of performance, high yield and low expenses.
Dividend yield: 5.6 percent
Expenses: 0.41 percent (includes 8-basis-point fee waiver)
First Trust Preferred Securities and Income ETF (FPE)
First Trust’s FPE is a hybrid play on the hybrid security. First Trust doesn’t just own preferred shares, but also investment-grade corporate debt, junk debt and convertible securities. This has the very intended effect of providing additional diversification, but also the interesting side effect of generating less volatility than even low-volume preferred funds. FPE’s beta is a mere 0.17, compared to 0.34 for the iShares U.S. Preferred Stock ETF (PFF) and 0.2 for PFXF. And like preferred and junk-bond ETFs, the FPE pays out its distributions on a monthly basis.
Dividend yield: 5.6 percent
Expenses: 0.85 percent
VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM)
If you’re willing to be daring, HYEM pairs the high risk of junk debt with the high risk of emerging markets. But it cuts down on risk by investing in roughly 350 different issues across numerous emerging markets including China (13.6 percent), Brazil (9.7) and Turkey (9.2), and by investing heavily in BBB-rated debt (62 percent). This is no Roman candle waiting to go off, and in fact, the HYEM has outperformed U.S. counterparts like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) on a pure price basis since inception in 2012.
Dividend yield: 5.6 percent
Expenses: 0.5 percent (includes 10-basis-point fee waiver)
SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
The JNK is the classic example of accepting higher risk for higher yield. JNK, one of the largest junk bonds on the market at more than $11 billion in assets under management, invests in more than 950 below-investment-grade bonds primarily in the utility sector (89 percent), with the rest in finance and utility company debt. SPDR’s junk bond ETF features a longer average maturity (6.2 years to 4.3 years) and more BB-or-lower debt (57 percent to 48 percent) than its rival, the HYG, and as a result yields substantially more (6.4 percent to 5.1 percent).
Dividend yield: 6.4 percent
Expenses: 0.4 percent
iPath S&P MLP ETN (IMLP)
The simplest way to invest in the high yields of master limited partnerships is via exchange-traded notes, which don’t actually hold the securities, but instead merely mimic an index’s performance (including distributions). While this mutes some of the tax advantages of MLP investing, it eliminates the tax complexity and kills the need for the dreaded K-1 form. The IMLP, like most MLP funds, focuses on energy infrastructure plays such as Enterprise Products Partners L.P. (EPD), a natural gas and crude oil pipeline firm, and Energy Transfer Partners LP (ETP), which operates natural gas, propane and other pipelines.
Dividend yield: 7 percent
Expenses: 0.8 percent
YieldShares High Income ETF (YYY)
“Multi-asset” funds can invest in several asset types, but usually stick to stocks and bonds. YYY is no different, with a clean 75/25 mix of debt and equity. Also like many multi-asset funds, this YieldShares ETF doesn’t invest in individual securities, but through closed-end funds, which can use leverage to help generate additional returns and income. Thus, YYY sports just 30 holdings, including top weights Eaton Vance Tax-Advantaged Global Dividend Income Fund and Doubleline Income Solutions Fund.
Dividend yield: 8.1 percent
Expenses: 1.72 percent (includes 122 basis points of acquired fund fees and expenses)
iShares Mortgage Real Estate Capped ETF (REM)
Mortgage REITs are a type of real estate investment trust that doesn’t actually own or operate properties, but instead buys or originates mortgages and mortgage-backed securities. Thus, they don’t make money off rents, but off interest income. This is a smaller and more dangerous area of the real estate world, as these companies utilize leverage to juice their gains and are more sensitive to interest-rate changes than “regular” REITs, but it results in far higher yields. iShares’ REM defrays a little bit of this risk by exposing investors to 34 different mREITs including Annaly Capital Management (NLY) and AGNC Investment Corp. (AGNC).
Dividend yield: 8.9 percent
Expenses: 0.48 percent
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9 of the Best High-Yield ETFs on the Market originally appeared on usnews.com
