Morningstar says these high-yield ETFs are among the best.
Exchange-traded funds are a great way to add diversification to a portfolio and generate a reliable source of dividend income. High-yield ETFs can be particularly appealing for their large payouts, but investors must be discerning. Just because a fund has a high yield doesn’t mean it’s a good investment or that it will maintain its yield over the long term. With thousands of ETFs to choose from, investors should focus on funds with low fees and reasonable valuations. Here are seven high-yield ETFs with at least a 2.5% dividend yield, an expense ratio of 0.50% or less, and a Morningstar five-star rating.
Pimco 15+ Year U.S. TIPS Index ETF (ticker: LTPZ)
The LTPZ fund provides exposure to Treasury inflation-protected securities, or TIPS. TIPS are a type of U.S. Treasury bond that is indexed to an inflationary gauge that helps protect investors from the negative impact of inflation. As inflation rises, the principal value of TIPS bonds rises as well. The LTPZ fund is a particularly good investment in an inflationary environment. The consumer price index increased 7.9% in February, the highest monthly inflation reading since 1982. In addition to offering inflation protection, the LTPZ fund also has an expense ratio of just 0.20%.
Current yield: 5.5%.
VanEck Fallen Angel High Yield Bond ETF (ANGL)
The ANGL fund provides exposure to high-yield corporate bonds, also known as junk bonds. Junk bonds are issued by companies with credit ratings below investment-grade levels. Junk bonds can be much higher-risk than investment-grade bonds, but they also typically pay much higher yields. Because the ANGL fund holds 247 different bonds, its diversification helps insulate investors from risks associated with each individual company and provides exposure to bonds that may not be included in other fixed-income funds. The fund’s expense ratio is 0.35%. Its top holdings include bonds from Sprint Capital Corp., Kraft Heinz Co. (KHC) and Occidental Petroleum Corp. (OXY).
Current yield: 4.5%.
ALPS International Sector Dividend Dogs ETF (IDOG)
The IDOG ETF tracks the S-Network International Sector Dividend Dogs Index, which holds the five large-cap international stocks with the highest dividend yields in 10 different market sectors. The roughly 50 stock holdings in the IDOG ETF are an excellent way for investors to diversify into international equities and generate steady income. The fund’s 0.50% expense ratio is the highest among the ETFs on this list, but it is still relatively low compared with many other actively managed funds. The IDOG ETF’s top holdings include England’s BAE Systems (BAESY), Anglo American PLC (NGLOY) and Japan’s Marubeni Corp. (MARUY).
Current yield: 3.5%.
Schwab Fundamental International Large Company Index ETF (FNDF)
The FNDF fund specifically targets international stocks. It chooses and weights its holdings based on RAFI fundamental metrics, including sales, cash flow and capital returns. This unique approach assures investors the FNDF fund portfolio contains only high-quality international stocks, many of which also pay attractive dividends. The $7 billion fund has a 0.25% expense ratio and 925 holdings, providing extremely diversified exposure to the international market. About 53% of the fund’s holdings come from Europe, while nearly 39% of holdings come from the Asia Pacific region. Top holdings include Shell PLC (SHEL), BP PLC (BP) and Samsung Electronics Co. Ltd. (SSNLF).
Current yield: 2.6%.
iShares Fallen Angels USD Bond ETF (FALN)
The FALN fund is another popular high-yield corporate bond fund that invests in bonds that originally had investment-grade ratings when they were issued but have since been downgraded. All holdings are denominated in U.S. dollars and come from developed-market issuers. The fund heavily weights higher-rated BB and B bonds that have relatively long maturities and high exposure to rising interest rates. The fund holds 309 different securities, including bonds from Vodafone Group PLC (VOD), Sprint Capital and Intesa Sanpaolo SpA (ISNPY). The FALN fund has $3.5 billion in assets and an expense ratio of just 0.25%.
Current yield: 4.8%.
Energy Select Sector SPDR Fund (XLE)
The energy sector has come to life in the past two years as a combination of booming global energy demand, high inflation and geopolitical conflict in Ukraine has pushed crude oil prices to their highest levels in 13 years. While the S&P 500 has dropped 7.4% year to date in 2022, the XLE fund is already up 33% year to date. The XLE is one of State Street Global Advisors’ most popular S&P 500 sector ETFs, providing exposure to some of the world’s largest energy companies. XLE’s top holdings include Exxon Mobil Corp. (XOM), Chevron Corp. (CVX) and EOG Resources Inc. (EOG).
Current yield: 3.0%.
VictoryShares U.S. Small Cap High Dividend Volatility Wtd ETF (CSB)
The CSB fund targets a very specific type of small-cap stock. To qualify for inclusion in the fund, a company must be among the 500 largest U.S. public companies with market capitalizations under $3 billion that have generated positive earnings in each of the past four quarters. Among those qualified stocks, the fund selects the 100 stocks with the highest dividend yields and weights them based on volatility, with the least volatile stocks getting the highest weighting. The CSB fund has a 0.35% expense ratio. Top holdings include CSG Systems International Inc. (CSGS), Otter Tail Corp. (OTTR) and Chesapeake Utilities Corp. (CPK).
Current yield: 2.7%.
7 best high-yield ETFs to buy for income investors:
Pimco 15+ Year U.S. TIPS Index ETF (LTPZ)
VanEck Fallen Angel High Yield Bond ETF (ANGL)
ALPS International Sector Dividend Dogs ETF (IDOG)
Schwab Fundamental International Large Company Index ETF (FNDF)
iShares Fallen Angels USD Bond ETF (FALN)
Energy Select Sector SPDR Fund (XLE)
VictoryShares U.S. Small Cap High Dividend Volatility Wtd ETF (CSB)
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7 High-Yield ETFs for Income Investors originally appeared on usnews.com
Update 03/21/22: This story was published at an earlier date and has been updated with new information.
