Not every investor wants to beat the market. Some prefer stability and steady cash flow over assets with more potential but greater risk.
For this reason, some investors gravitate toward low-fee, cash-flow-producing assets like income exchange-traded funds, or ETFs, as they get closer to retirement and want their portfolios to assist with living expenses.
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What Is an Income ETF?
An income ETF is a publicly traded fund that focuses on income-producing assets instead of capital gains. These funds prioritize dividend stocks and bonds. A few income ETFs also generate high yields by selling options contracts.
These funds can save investors considerable time. Fund managers do all of the research to discover which assets fulfill the fund’s criteria. Buying income ETFs is easier than building and managing a portfolio of dividend stocks and bonds. These funds also help reduce risk.
“Income ETFs provide a diversified way to generate regular income,” says Michael Hammelburger, CEO of The Bottom Line Group. “These funds typically consist of a variety of income-generating assets, such as dividend-paying stocks or fixed-income securities. This diversification helps spread risk and can contribute to more stable returns.”
Investors can review an income ETF’s assets, expense ratio and historical performance to determine if the fund is optimal for their financial objectives and risk tolerance.
Beta is a measurement of an asset’s risk compared to a benchmark, such as the stock market, giving some insight into its volatility. A stock with a beta higher than 1 typically carries more risk and usually has higher returns. A beta lower than 1 tends to indicate less risk and lower returns. Remember, however, that it is possible for a volatile asset to have a beta as low as zero, which indicates it is moving in alignment with the market.
These are some of the top income ETFs to consider if you’re getting started with this investment type, and most of them have a relatively low beta, as measured on a monthly basis for 60 months:
| Income ETF | 30-Day SEC Yield | Beta (5-year monthly) | Expense ratio |
| Vanguard High Dividend Yield ETF (ticker: VYM) | 3.25% | 0.77 | 0.06% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 3.74% | 0.78 | 0.06% |
| Invesco High Yield Equity Dividend Achievers ETF (PEY) | 5.12% | 0.75 | 0.52% |
| iShares Core High Dividend ETF (HDV) | 4.34% | 0.67 | 0.08% |
| Vanguard Real Estate ETF (VNQ) | 3.85%* | 1.17 | 0.12% |
| SPDR S&P Dividend ETF (SDY) | 2.65% | 0.82 | 0.35% |
| iShares Core Dividend Growth ETF (DGRO) | 2.78% | 0.84 | 0.08% |
| WisdomTree U.S. Quality Dividend Growth Fund (DGRW) | 1.85% | 0.84 | 0.28% |
*Unadjusted effective yield as of Nov. 30. Adjusted yield is 2.71%.
Vanguard High Dividend Yield ETF (VYM)
Vanguard High Dividend Yield ETF focuses on large-value stocks with high yields. This ETF only has a 0.06% expense ratio but commands $60.5 billion in net assets. The fund has a 30-day SEC yield of 3.3%.
The fund invests in 452 stocks and uses the FTSE High Dividend Yield Index as a benchmark. The fund’s three largest sector concentrations are in financials, consumer staples and health care, and its top three positions are Exxon Mobil Corp. (XOM), JPMorgan Chase & Co. (JPM) and Johnson & Johnson (JNJ). These stocks make up almost 10% of the fund’s total assets.
VYM has generated a 2.7% year-to-date return as of Dec. 11, but has an annualized return of 9.1% by market price over the past five years, according to Morningstar data. The fund has a 0.77 beta, which indicates it may be less volatile than some other investments.
Schwab U.S. Dividend Equity ETF (SCHD)
Schwab U.S. Dividend Equity ETF aims to mirror the Dow Jones U.S. Dividend 100 Index. Although shares are flat year to date, the fund has gained 12.2% annualized over the past five years as of Dec. 11. SCHD also has a reasonable 0.06% expense ratio and about $49 billion in net assets.
Investors get to enjoy a 3.7% 30-day SEC yield with this ETF, which has 104 holdings and prioritizes large value stocks in the industrial, health care and financial sectors. The top three positions are Verizon Communications Co. (VZ), Amgen Inc. (AMGN) and Broadcom Inc. (AVGO). These three stocks make up over 13% of the fund’s total assets.
The fund has a 0.78 beta and puts almost 70% of its capital into stocks valued above $70 billion.
Invesco High Yield Equity Dividend Achievers ETF (PEY)
The Invesco High Yield Equity Dividend Achievers ETF uses the Nasdaq U.S. Dividend Achievers 50 Index as its benchmark. The fund has a 0.52% expense ratio and rebalances its assets in March, June, September and December.
PEY has a higher 30-day SEC yield than the other funds mentioned so far, at 5.12%. Investors may benefit from lower volatility since the fund has a 0.75 beta.
PEY has delivered a 2.2% year-to-date return for investors so far in 2023, but it has an annualized return of 8.3% over the past five years and 11.7% over 15 years.
The three largest sector allocations in the fund are financials, utilities and consumer staples. PEY’s top three stocks are Universal Corp. (UVV), Verizon and Altria Group Inc. (MO). These stocks each make up more than 3% of the fund’s total assets.
iShares Core High Dividend ETF (HDV)
The iShares Core High Dividend ETF gives investors exposure to 75 dividend-paying stocks and only holds positions in U.S. companies. The fund has a 4.3% 30-day SEC yield and a 0.08% expense ratio. HDV has over $10 billion in net assets.
This ETF places a large portion of its funds into its top assets. Exxon Mobil, Verizon and Johnson & Johnson round out the top three positions. These three stocks together represent more than 20% of HDV’s total assets. The top 10 positions compose more than 50% of the fund’s portfolio, with energy, health care and consumer staples as the top three sectors.
The strategy has helped the fund achieve a 7.6% annualized return over the past 10 years, though it’s down a hair year to date. HDV’s 0.67 beta may indicate that it is less vulnerable to dramatic market swings than other investments.
Vanguard Real Estate ETF (VNQ)
The Vanguard Real Estate ETF concentrates on real estate investment trusts, or REITs, and aims to track the MSCI U.S. Investable Market Real Estate 25/50 Index. Vanguard calculates the yield each month and does not quote a 30-day SEC yield for this fund due to the tax issues involved with REITs. Vanguard posted that the unadjusted effective yield is 3.9% as of Nov. 30. The adjusted effective yield is 2.7% and reflects tax payments.
VNQ has a 0.12% expense ratio and $59.9 billion in total net assets. The fund’s top three stocks are Prologis Inc. (PLD), American Tower Corp. (AMT) and Equinix Inc. (EQIX), which represent more than 18% of the fund’s portfolio. The Vanguard Real Estate ETF has delivered a 4.8% year-to-date return by market price as of Dec. 11 and has a 1.17 beta. It has an annualized return of 4.3% over the past five years.
SPDR S&P Dividend ETF (SDY)
The SPDR S&P Dividend ETF has over $20 billion in assets under management and a 0.35% expense ratio. The fund only invests in companies that have increased their dividends for at least 20 consecutive years.
SDY prioritizes industrials, consumer staples and utilities. The top three stocks in the fund are 3M Co. (MMM), Realty Income Corp. (O) and International Business Machines Corp. (IBM). These three stocks make up more than 8% of the fund’s total assets.
SDY is down slightly year to date but has gained an annualized 8.3% over the past five years and an even more impressive 11.9% over 15 years. The fund has a 0.82 beta, which may make it less volatile than some investments. SDY has a 30-day SEC yield of 2.7%.
iShares Core Dividend Growth ETF (DGRO)
The iShares Core Dividend Growth ETF has a low 0.08% expense ratio and spreads its $24.3 billion in net assets across 430 holdings. The fund has a 2.78% 30-day SEC yield and uses the Morningstar U.S. Dividend Growth Index as its benchmark.
The dividend fund allocates toward several sectors but primarily caters to financials, health care and information technology. The fund’s top three holdings are Microsoft Corp. (MSFT), JPMorgan Chase and Apple. Each of these individual stocks makes up more than 3% of the fund’s total assets.
The fund has gained 7.1% year to date and is up by 11.3% annualized over the past five years. Despite the gains, DGRO maintains a 0.84 beta.
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
The WisdomTree U.S. Quality Dividend Growth Fund is a top-performing dividend ETF that has 297 holdings and a 0.28% expense ratio. The fund has $10.6 billion in net assets and has delivered a 15.2% return year to date as of Dec. 11. It has an annualized return of 13.5% over the past five years.
The dividend fund is tech-heavy, with more than 30% of assets in the technology sector. Consumer defensive and industrial allocations hold the No. 2 and No. 3 spots, respectively. The fund’s top three holdings are Microsoft, Apple and Broadcom, and the trio make up more than 19% of DGRW’s total assets.
The fund has a 30-day SEC yield of 1.9%. The payout is lower than the other income ETFs on this list, but DGRW more than compensates with its higher total returns. DGRW has a 0.84 beta.
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