The rising interest rate environment of 2022 may have caused losses for most investors, but there is a silver lining. With interest rates now sitting at new highs, even the humblest of assets like the three-month U.S. Treasury bill is yielding upwards of 5.3%.
For income-hungry investors, the prospect of a 5.3% annual yield for taking on what amounts to virtually no risk can be tantalizing. That being said, these yields aren’t guaranteed. Should interest rates eventually be cut, or the current inverted yield curve resolve itself and long-term yields rise, short-term yields will likely fall.
For income investors looking to beat the yields on Treasury bills, a variety of assets exist that could fulfill the role. These include corporate bonds, covered call options, preferred shares, dividend stocks, real estate investment trusts, or REITs, or even high-yield bonds.
However, gaining access to these assets, much less picking the best ones, can be difficult. To simplify the matter, consider buying an exchange-traded fund, or ETF, that explicitly makes high-yield income one of its main objectives. This approach can offer greater transparency and liquidity.
“Another key benefit of income ETFs compared to selecting a few individual companies is diversification, as they invest in a basket of income-generating assets that can help to mitigate risk and provide a more stable income stream,” says Rohan Reddy, director of research at Global X ETFs.
Here are seven high-yield income ETFs yielding more than 5%:
| High-Yield ETF | Expense Ratio |
| Invesco Preferred ETF (ticker: PGX) | 0.5% |
| Invesco Fundamental High Yield Corporate Bond ETF (PHB) | 0.5% |
| Global X Nasdaq 100 Covered Call ETF (QYLD) | 0.6% |
| Global X Russell 2000 Covered Call ETF (RYLD) | 0.6% |
| JPMorgan Equity Premium Income ETF (JEPI) | 0.35% |
| Global X SuperDividend ETF (SDIV) | 0.58% |
| Global X SuperDividend REIT ETF (SRET) | 0.59% |
Invesco Preferred ETF (PGX)
“Preferred shares are an interesting ‘hybrid strategy’ — they sort of act like debt, but also move like equities,” says Derek Horstmeyer, professor of finance at the George Mason University School of Business. “If you want an income-generating asset class that has more risk than bonds but less risk than equities, they might appeal to you.”
This ETF tracks the ICE BofAML Core Plus Fixed Rate Preferred Securities Index by sampling its constituents to ensure sufficient liquidity. Most of the preferred shares held by this ETF are issued by big U.S. banks like JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC). Currently, PGX is paying out a 30-day SEC yield of 6.2%. The ETF charges a 0.5% expense ratio, or $50 annually on a $10,000 investment.
Invesco Fundamental High Yield Corporate Bond ETF (PHB)
On the bond side, the highest-yielding bonds are those with a credit rating that falls below investment grade. Referred to as “junk” bonds, these bonds make up for the higher risk of default by paying higher yields. In terms of risk, they sit somewhere between equities and investment-grade corporate bonds. For investors willing to assume the risk, these bonds can provide above-average levels of income.
To access a portfolio of high-yield bonds, investors can buy PHB, which tracks the RAFI Bonds US High Yield 1-10 Index. Currently, this ETF pays a 30-day SEC yield of 6.7%. However, a more accurate measure of its expected return is its yield to maturity of 7.2%, which is the theoretical return an investor could expect should all of PHB’s underlying bonds be held until maturity. The ETF charges a 0.5% expense ratio.
Global X Nasdaq 100 Covered Call ETF (QYLD)
“Covered call ETFs invest in a diversified portfolio of stocks and sell, or ‘write,’ call options on the underlying individual companies or indices,” Reddy says. “The result is a regular income stream through the premiums received from selling call options.”
In general, covered call ETFs tend to perform best in range-bound markets where volatility trends high, which increases options premiums.
One of the most popular covered call ETFs on the market is QYLD, which sports around $7.9 billion in assets under management, or AUM. This ETF holds a portfolio of stocks that replicates the Nasdaq-100 index, while selling covered calls on it. QYLD currently pays a 12-month trailing yield of 12.3% and has made monthly distributions for nine consecutive years. The ETF charges a 0.6% expense ratio.
[7 High-Yield Covered Call ETFs Income Investors Will Love]
Global X Russell 2000 Covered Call ETF (RYLD)
A notable factor that affects options pricing is the implied volatility of the underlying asset. In general, options
premiums tend to increase when volatility does. Consider the example of RYLD, which employs a similar covered call strategy as QYLD does, but for the small-cap-focused Russell 2000 index instead. By investing in the higher volatility of small caps, RYLD pays a higher 12-month trailing yield of 13.8%.
Pairing RYLD with QYLD can potentially provide income investors with greater diversification. With this approach, investors receive large-cap exposure via QYLD’s Nasdaq-100 index, and small-cap exposure via RYLD’s Russell 2000 index focus. The ETF also features monthly distributions and currently charges a 0.6% expense ratio.
JPMorgan Equity Premium Income ETF (JEPI)
Another highly popular covered call ETF is JEPI, which has attracted just over $26 billion in AUM. Unlike most of the previous ETFs, JEPI does not track an index. Instead, the ETF’s management team actively selects a portfolio of stocks from the S&P 500 index that they believe trade at attractive valuations and have defensive characteristics. The goal is to track the S&P 500’s returns with less volatility.
Then, JEPI deploys a covered call strategy to augment its monthly income potential. This is done via the use of exchange-linked notes, or ELNs, which are debt instruments with counterparties that provide exposure to the risks and returns of a covered call overlay based on the S&P 500 index. The result is a 30-day SEC yield of 8.5% and a 12-month trailing yield of 11%. JEPI charges a 0.35% expense ratio.
Global X SuperDividend ETF (SDIV)
“High-yield equity ETFs can provide investors with higher returns than traditional fixed-income ETFs due to their focus on dividend-paying stocks,” Reddy says. “They also offer diversification benefits by investing in a wide range of companies across various sectors and geographies.” A great example is SDIV, which tracks the Solactive Global SuperDividend Index.
SDIV is composed of the 100 highest-yielding dividend stocks from around the world. Currently, this translates to a 30-day SEC yield of 11.9%, and a 12-month trailing yield of 15%. For those seeking regular income, SDIV also makes monthly distributions, and has paid them for 11 years consecutively. The ETF charges a 0.58% expense ratio.
Global X SuperDividend REIT ETF (SRET)
“REITs are companies that own, operate or finance income-generating real estate properties,” Reddy says. “They are required to distribute at least 90% of their taxable income as dividends, which makes them a popular choice for investors seeking regular income.” To access 30 of the highest-yielding global REITs in a single ticker, the ETF to watch is SRET, which charges a 0.59% expense ratio.
“The selection process for SRET involves screening a broad universe of REITs based on dividend yield, followed by a filter to remove distressed or highly volatile constituents,” Reddy says. Currently, this ETF pays a 30-day SEC yield of 6.8%, and a 12-month trailing yield of 8.7%. Like SDIV, SRET pays distributions on a monthly basis and has done so for eight years running.
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7 High-Yield ETFs for Income Investors originally appeared on usnews.com
Update 06/26/23: This story was published at an earlier date and has been updated with new information.
