Younger investors tend to focus on total returns over income potential. For these investors, any dividends received are reinvested more or less immediately. By doing so, these investors can maximize the power of compounding. However, retired investors might prioritize higher income potential. These investors may rely on their portfolios for a steady stream of income to fund living expenses. By increasing their portfolio’s yield, a retired investor might be able to fund anticipated withdrawals without selling shares.
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Assets like dividend stocks, corporate bonds, preferred shares and covered calls can provide above-average yields, and numerous exchange-traded funds, or ETFs, exist that provide exposure to them. Here are the seven best high-yield ETFs income investors can buy in 2022:
— Vanguard High Dividend Yield ETF (ticker: VYM)
— iShares Core U.S. REIT ETF (USRT)
— iShares Broad USD Investment Grade Corporate Bond ETF (USIG)
— Vanguard Extended Duration Treasury ETF (EDV)
— SPDR Bloomberg High Yield Bond ETF (JNK)
— Invesco Financial Preferred ETF (PGF)
— Global X Nasdaq 100 Covered Call ETF (QYLD)
Vanguard High Dividend Yield ETF (VYM)
A great pick for passive investors seeking a low-cost, high-yield index fund is VYM. This ETF tracks the FTSE High Dividend Yield Index, which holds over 400 large-cap U.S. stocks selected for above-average dividend yields. Notable top holdings in VYM include health care, energy and financial sector stocks like Johnson & Johnson (JNJ), Exxon Mobil Corp. (XOM) and JPMorgan Chase & Co. (JPM). Currently, the ETF has a 2.9% 30-day SEC yield, which is the projected annualized yield an investor would receive based on a trailing-30-day period. While not the highest on this list, VYM still yields more than the average index fund. The ETF’s distributions are also taxed more favorably at the qualified dividends rate. The ETF costs an expense ratio of 0.06%, or about $6 per $10,000 invested annually.
iShares Core U.S. REIT ETF (USRT)
Real estate investment trusts, or REITs, are a great option for investors seeking income from real assets. Because REITs must distribute 90% of their income to investors annually, they often pay higher-than-average yields. With a REIT ETF like USRT, investors can mitigate security-specific risk, which is the chance of a single REIT pick performing poorly. USRT tracks the FTSE Nareit Equity REITS Index, which holds 140 U.S. REITs. Currently, the ETF pays a 12-month trailing yield of 3.5%, which is the yield an investor who held USRT over the last year would have received based on the ETF’s current net asset value, or NAV. USRT costs an expense ratio of 0.08%.
iShares Broad USD Investment Grade Corporate Bond ETF (USIG)
Corporate bonds are debt securities issued by a company. When you buy a corporate bond, you’re essentially loaning the company money, in exchange for regular interest payments, also known as the bond’s coupon, and your principal back when the bond matures. The credit quality of a corporate bond can vary, with BBB and higher bonds rated as “investment grade.” Investment-grade corporate bonds are generally safer and can still deliver a competitive interest rate. Case in point, consider USIG, which holds over 9,000 bonds and currently has a yield-to-maturity of 5.68%. This is the weighted average yield of all the bonds in an ETF’s portfolio, assuming they are held to maturity. With an effective duration of 6.76 years, USIG can be expected to fall 6.76% if interest rates rise by 1%, all else being equal. The opposite will happen if interest rates fall. USIG costs an expense ratio of 0.04%.
Vanguard Extended Duration Treasury ETF (EDV)
One of the ways investors can squeeze more yield out of a bond ETF is by increasing duration. By buying bonds with a further maturity date, investors receive a greater yield to compensate them for the higher interest rate risk. An option here is EDV, which holds U.S. Treasury Separate Trading of Registered Interest and Principal of Securities bonds, or STRIPS. STRIPS bonds are sold at a discount to their face value, without the usual semiannual coupon payments. This makes them highly sensitive to interest rate changes, with EDV having an average duration of 24.3 years. As such, they can be a good hedge against equity risk during crashes if interest rates are dropped, especially given that Treasurys are the “flight to safety” asset. On the other hand, when rates rise, EDV is a lousy option — even including distributions, the fund has lost 40.3% year to date through Nov. 15.
That said, if you think rates are close to peaking, EDV is a good play. Currently EDV has a yield-to-maturity of 4.4% and an expense ratio of 0.06%.
SPDR Bloomberg High Yield Bond ETF (JNK)
Another way investors can squeeze more yield out of bond ETFs is by decreasing credit quality. This can be done by buying high-yield bonds, also known as “junk bonds.” Junk bonds have credit ratings below investment grade, or BBB, but pay a higher coupon to compensate for the risk. Their overall returns are higher than other bonds, but they can lose substantial value during a market crash. A good ETF pick here is JNK, which is mostly composed of corporate bonds rated Ba1 (15.5%) and Ba3 (22.2%) by Moody’s, which translates to a BB+ and BB- rating by S&P and Fitch, respectively. Currently, JNK has a very high yield-to-maturity of 8.6%, and a low duration of 4.01 years. The ETF costs an expense ratio of 0.4%.
Invesco Financial Preferred ETF (PGF)
Preferred shares are hybrid securities with bond and stock features. Like bonds, they pay fixed amounts and have credit ratings. Like stocks, they trade openly on exchanges under their own ticker and their distributions are categorized as dividends. In the company’s capital structure, preferred shareholders have higher priority upon bankruptcy or liquidation than shareholders, but lower than bondholders. Adding preferred shares to an income portfolio can potentially increase diversification thanks to their lower correlation to stocks and bonds. Because buying individual preferred shares can be illiquid and complicated, a better option might be via an ETF like PGF. This ETF currently pays a 12-month trailing yield of 5.6% and costs an expense ratio of 0.57%.
Global X Nasdaq 100 Covered Call ETF (QYLD)
QYLD uses a “buy-write” options strategy. QYLD implements this by first purchasing all the stocks in the Nasdaq 100 index. Then, the ETF sells out-of-the-money Nasdaq 100 index call options against its underlying holdings, dated a month out until expiry. In return, QYLD receives a cash premium, distributed to investors as monthly income. The size of this premium is affected by many variables, notably the implied volatility of the underlying index. Because the Nasdaq 100 is so volatile, QYLD nets large premiums. Currently, the ETF has a 12-month trailing yield of 16.4%. However, QYLD isn’t a free lunch. During a bull market, the covered call overlay can cap its upside potential, causing it to lag a vanilla Nasdaq 100 ETF. QYLD costs an expense ratio of 0.6%.
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7 High-Yield ETFs for Income Investors originally appeared on usnews.com
Update 11/16/22: This story was published at an earlier date and has been updated with new information.
