The traditional 4% rule — which suggests that you can withdraw 4% of your portfolio in the first year of retirement and adjust it for inflation thereafter without running out of money for at least 30 years — has long been the cornerstone of retirement planning.
There are two primary ways to achieve this 4% target: either by selling a portion of the portfolio each year or by generating income through the portfolio’s investments. The latter approach focuses on assets that pay dividends, such as individual stocks, or interest, like bonds.
But there’s a catch: Many traditional income-generating assets no longer offer yields that can comfortably meet or exceed that 4% threshold.
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Enter the new breed of high-yield exchange-traded funds, or ETFs. Asset managers have taken note of the income conundrum and are now offering an array of ETFs designed to address the needs of income-hungry investors.
These funds employ diverse strategies and provide exposure to alternative income-bearing assets, such as real estate investment trusts, or REITs, preferred shares, high-yield corporate bonds, covered calls and more. Notably, many of these funds offer annualized yields of 5% and above, with some even making monthly payouts.
“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.
By diversifying into these high-yield ETFs, investors have an opportunity to secure a more robust income stream, providing a viable way to meet or exceed the 4% rule while potentially also enjoying some moderate capital appreciation.
Here are seven high-yield ETFs to buy in 2023 for income:
| ETF | Dividend yield (trailing 12 months) | Expense ratio |
| iShares Preferred and Income Securities ETF (ticker: PFF) | 6.8% | 0.46% |
| Global X Nasdaq 100 Covered Call ETF (QYLD) | 12.4% | 0.6% |
| Global X S&P 500 Covered Call ETF (XYLD) | 11.7% | 0.6% |
| Global X Russell 2000 Covered Call ETF (RYLD) | 13.5% | 0.6% |
| JPMorgan Equity Premium Income ETF (JEPI) | 10.2% | 0.35% |
| Amplify CWP Enhanced Dividend Income ETF (DIVO) | 3.7% | 0.55% |
| Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) | 4.3% | 0.3% |
iShares Preferred and Income Securities ETF (PFF)
“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.”
PFF is a popular preferred shares ETF with over $12.7 billion in assets under management, or AUM. By tracking the ICE Exchange-Listed Preferred & Hybrid Securities Index, the ETF holds around 460 preferred share issues, mostly from financial institutions averaging a 12-month-trailing yield of 6.8% as of July 31. The ETF charges a 0.46% 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.” These ETFs tend to have limited upside appreciation, but have the potential to generate higher than average, consistent income.
The most popular ETF in Global X ETFs’ lineup is QYLD, which currently has just over $8 billion in AUM. This ETF sells covered call options on the Nasdaq-100 Index, a market-cap-weighted index of the largest 100 non-financial sector stocks listed on the Nasdaq exchange. As of Aug. 28, QYLD pays a 12-month-trailing yield of 12.4%, with a 0.6% expense ratio.
Global X S&P 500 Covered Call ETF (XYLD)
For greater diversification, income investors can opt for XYLD over QYLD. This ETF tracks the much broader S&P 500 index, which is less concentrated in the technology sector, has financial industry exposure and holds 500 underlying stocks. Like QYLD, XYLD uses a covered call selling strategy, which converts the ETF’s potential upside appreciation into an immediate cash premium.
Because the S&P 500 tends to be less volatile than the Nasdaq-100, XYLD’s 12-month distribution yield tends to be lower than QYLD, currently clocking in at 11.7%. Nonetheless, this is still very high. So far, XYLD has made monthly distributions for 10 consecutive years and has accrued around $2.9 billion in AUM. The ETF also charges a 0.6% expense ratio.
Global X Russell 2000 Covered Call ETF (RYLD)
Both XYLD and RYLD have a large-cap focus due to the nature of their underlying indexes, the S&P 500 and Nasdaq-100, respectively. To diversify further into small-caps, income investors can complement both ETFs with RYLD. This ETF tracks the Russell 2000 index, which comprises small-cap stocks and implements a similar covered call strategy to generate above-average monthly income.
The size of the premiums received from selling covered calls can fluctuate based on many factors, one of which is the volatility of the underlying holdings. Because the small-caps in the Russell 2000 tend to be more volatile than large-caps, this translates into a higher potential yield for RYLD. As of Aug. 28, RYLD pays a 12-month-trailing yield of 13.5%, higher than QYLD. It also charges a 0.6% expense ratio.
[READ: 7 Small-Cap Value ETFs to Buy in 2023]
JPMorgan Equity Premium Income ETF (JEPI)
QYLD, XYLD, and RYLD are index-based, meaning that their underlying holdings are selected based on a reference external benchmark. In contrast, ETFs like JEPI are actively managed, meaning that the fund’s manager, JPMorgan Asset Management, selects securities based on its own proprietary strategy and outlook. Currently, JEPI is the most popular actively managed ETF in the U.S., with $28.9 billion in AUM.
JEPI’s holdings currently consist of large-cap, blue-chip U.S. stocks such as Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT) and Mastercard Inc. (MA). Then, the ETF uses equity-linked notes, or ELNS, to provide exposure to a covered call strategy based on the S&P 500 index. Currently, JEPI pays a 12-month rolling dividend yield of 10.2%. The ETF also charges a lower expense ratio of 0.35%.
Amplify CWP Enhanced Dividend Income ETF (DIVO)
DIVO is a derivative-income ETF that has earned a five-star rating from Morningstar, having historically outperformed the majority of its category peers on a risk-adjusted basis. This actively managed ETF begins by selecting a concentrated portfolio of quality large-cap stocks with dividend growth traits, aiming for a portfolio of 20 to 25 holdings balanced between sectors.
Then, the ETF’s management team “writes,” or sells, covered call options tactically on individual stocks based on opportunities and risks that pop up on their radar. The goal of DIVO is to maximize risk-adjusted returns while ensuring a respectable level of monthly income, with the ETF currently paying a 12-month-trailing yield of 3.7%. DIVO charges a 0.55% expense ratio.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Income investors looking to avoid the complexity of a derivatives-focused strategy can use a plain-vanilla ETF like SPHD in their quest for higher yields. This ETF does not employ covered calls. Rather, it tracks the S&P 500 Low Volatility High Dividend Index, which, as its name suggests, employs a set of screeners to ensure higher-than-average dividend yields while checking for lower-than-average volatility.
SPHD’s index begins by ranking all the S&P 500 stocks in descending order by their 12-month-trailing dividend yield. Then, the top 75 highest-yielding stocks are selected, with a maximum of 10 from each of the 11 sectors. Finally, the 50 stocks with the lowest realized volatility over the past 252 trading days are selected. SPHD pays a 12-month yield of 4.3% against a 0.3% expense ratio.
[SEE: 9 Highest Dividend-Paying Stocks in the S&P 500]
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7 High-Yield ETFs for Income Investors originally appeared on usnews.com
Update 08/29/23: This story was published at an earlier date and has been updated with new information.
