Investors seeking cash flow from passive investments that don’t require much extra work can turn to income exchange-traded funds, or ETFs. These funds invest in bonds or dividend-paying stocks and manage the assets for you.
These ETFs also involve less effort than other passive income investments, such as rental real estate and product royalties. Just put your money into a fund, and you generate extra income via the next eligible distribution.
Investors often gravitate toward these types of funds as they get closer to retirement and seek more financial stability, but anyone can benefit from the portfolio ballast that income ETFs provide.
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What Is an Income ETF?
An income ETF is a publicly traded fund that holds income-producing assets such as dividend stocks and bonds. These funds aim to reward investors with high distributions, with capital appreciation as a secondary objective.
Andy Wang, managing partner at Runnymede Capital Management, highlights the strengths income ETFs have over growth-oriented funds: “Income ETFs are attractive to investors who prioritize stability and cash flow over the pursuit of market-beating returns. Those looking for reliable income streams, especially as they approach retirement and aim to cover living expenses, often find low-fee, cash-flow-producing income ETFs a strategic choice.”
Investors can buy their own dividend stocks, bonds and other income-producing assets. It’s possible to construct a portfolio that resembles a fund. However, you would then have to stay on top of each investment. Fund managers can do that for you.
When reviewing income ETFs, investors should consider the fund’s historical performance, expense ratio, yield, distribution schedule and management. Each of these factors can help investors make better decisions.
For instance, a high-yield ETF may look attractive based on its payout. However, if that fund has an inconsistent distribution schedule or poor historical returns, it may not be the right choice. Each element offers more context.
“By examining these elements collectively, investors can make more informed decisions, aligning their investment choices with their financial goals and risk tolerance,” Wang says.
Investors can choose from a wide variety of income ETFs, but these are some of the top funds to consider:
| Income ETF | 30-day SEC yield | Expense ratio |
| iShares International Select Dividend ETF (ticker: IDV) | 6% | 0.51% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 3.5% | 0.06% |
| SPDR S&P Dividend ETF (SDY) | 2.6% | 0.35% |
| Vanguard High Dividend Yield ETF (VYM) | 3.1% | 0.06% |
| WisdomTree U.S. Quality Dividend Growth Fund (DGRW) | 1.6% | 0.28% |
| iShares iBoxx $ High Yield Corporate Bond ETF (HYG) | 7.3% | 0.49% |
| JPMorgan Equity Premium Income ETF (JEPI) | 7% | 0.35% |
| Vanguard Dividend Appreciation ETF (VIG) | 1.8% | 0.06% |
iShares International Select Dividend ETF (IDV)
The iShares International Select Dividend ETF prioritizes high-dividend stocks in non-U.S. developed markets. The fund has a 0.51% expense ratio and a 6% 30-day SEC yield. The ETF’s 12-month trailing yield is 6.6% when calculated based on its net asset value at the end of January.
IDV has $4.3 billion in assets spread across 131 holdings, but 31% of its assets are concentrated in the top 10 stocks. Its top three positions are Rio Tinto Group (RIO), Mitsui O.S.K. Lines Ltd. (OTC: MSLOY) and BHP Group Ltd. (BHP). These equities make up more than 12% of assets.
Investors will receive outsized exposure to the financials sector, which makes up 27% of the fund’s total assets. The next-most-concentrated sector holdings are in industrials, materials and utilities, which represent a combined 47% of assets.
Schwab U.S. Dividend Equity ETF (SCHD)
The Schwab U.S. Dividend Equity ETF aims to mirror the total return of the Dow Jones U.S. Dividend 100 Index. SCHD is a low-cost fund with a 0.06% expense ratio and is diversified across 104 securities. The fund has $52.7 billion in total assets and has a quarterly distribution schedule.
The fund consists of large-cap companies that value investors would appreciate. The fund’s top three holdings are Broadcom Inc. (AVGO), Merck & Co. (MRK) and AbbVie Inc. (ABBV). Each of the fund’s top 10 holdings is roughly 4% of its total assets. The top three sectors are industrials, health care and financials, representing nearly half of SCHD’s holdings.
Rated five stars by Morningstar, SCHD has a 30-day SEC yield of 3.5% and a trailing-12-month yield that is also 3.5%. The fund has returned an annualized 12.9% over the past five years as of Feb. 1.
SPDR S&P Dividend ETF (SDY)
The SPDR S&P Dividend ETF has $20.4 billion in assets under management and a 0.35% expense ratio. The fund uses the S&P High Yield Dividend Aristocrats Index as its benchmark. The fund favors elite dividend payers: It consists only of dividend stocks that have increased their payouts for at least 20 consecutive years.
SDY has 139 holdings and a 30-day SEC yield of 2.6%. The fund’s trailing-12-month yield is a consistent 2.7%. Its top three holdings are 3M Co. (MMM), Realty Income Corp. (O) and Edison International (EIX). These three stocks make up more than 6% of the fund’s total assets.
The top three sectors covered by the ETF are industrials, consumer staples and utilities, which include more than half of the fund’s positions.
Vanguard High Dividend Yield ETF (VYM)
The Vanguard High Dividend Yield ETF focuses on large-cap value stocks and has a 0.06% expense ratio. The fund’s 30-day SEC yield is 3.1%, as is the trailing-12-month yield. VYM tracks the FTSE High Dividend Yield Index.
The passively managed fund has a compound annual growth rate of 10.7% over the past three years as of Feb. 1. Its 15-year annualized return is even better, at 12.9%. VYM holds 449 stocks and has JPMorgan Chase & Co. (JPM), Broadcom and Exxon Mobil Corp. (XOM) as its top stocks. These three holdings make up almost 10% of the fund’s total assets.
The fund concentrates its assets on financials, consumer staples, health care and industrials. While these four sectors represent about 60% of the fund’s total assets, financials are doing the heavy lifting, with 22% of assets.
[READ: 10 Awesome Dividend Stocks for Guaranteed Income]
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
The WisdomTree U.S. Quality Dividend Growth Fund is a top-performing income ETF with a 14.4% annualized return over the past five years as of Feb. 1. That return comes with a 1.6% 30-day SEC yield and a similar trailing yield for the past 12 months.
The fund’s top three holdings are Microsoft Corp. (MSFT), Apple Inc. (AAPL) and AbbVie. These stocks represent more than 16% of the fund’s total assets.
DGRW is a tech-heavy fund with 29% of its total assets in the technology sector. The next three sectors are health care, industrials and financials, which make up about 43% of the fund’s total assets.
The fund has $11.9 billion in total assets and a 0.28% expense ratio.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
The iShares iBoxx $ High Yield Corporate Bond ETF offers additional stability in exchange for lower returns. The fund specializes in high yields but, like DGRW, it doesn’t have returns as high as some of the other funds on this list.
HYG prioritizes U.S. dollar-denominated high-yield corporate bonds and has a 7.3% 30-day SEC yield, with a trailing-12-month yield of 5.7%. The fund’s top two issuers are TransDigm and Mozart Debt Merger Subordinated, and those investments get only a 0.46% portfolio weighting each. HYG’s assets are spread out among 1,191 bond holdings with only 3.8% invested in the top 10, and most of the bonds are rated BB or below.
This solid fixed-income fund has $19.2 billion in total assets, with nearly half allocated to the consumer and communications sectors. It has a 0.49% expense ratio.
JPMorgan Equity Premium Income ETF (JEPI)
The JPMorgan Equity Premium Income ETF has a reasonable 0.35% expense ratio and an attention-grabbing 30-day SEC yield of 7%. Its trailing-12-month yield is 8.3%, based on its net asset value at the end of January. JEPI uses derivatives to increase the yield it offers investors. Impressively, it also has a 10% annualized return for the past three years, which beats the category average by nearly three percentage points.
JEPI has $31.8 billion in total assets that are spread across 132 holdings. The fund’s top three stocks are Progressive Corp. (PGR), Microsoft and Amazon.com Inc. (AMZN). The fund isn’t heavily concentrated in a handful of stocks, as these three top holdings represent only 5% of the fund’s total assets.
The fund’s top three sectors are information technology, health care and industrials, and these sectors encompass 46% of the fund’s total assets.
Vanguard Dividend Appreciation ETF (VIG)
The Vanguard Dividend Appreciation ETF has performed well compared to other income funds, gaining an annualized 13% over the past five and 15 years as of Feb. 1. VIG may have a lower 1.8% 30-day SEC yield, but it also has an ultra-low expense ratio of 0.06%.
The fund uses the S&P U.S. Dividend Growers Index as its benchmark. VIG prioritizes large-cap stocks that have consistently raised their dividends over several years. The fund spreads its $74.7 billion in total assets across 315 stocks, but 32% of assets are in its top 10 holdings. The top three are Microsoft, Apple and JPMorgan Chase.
VIG leans toward technology stocks, which make up almost a quarter of the fund’s holdings. The next three sectors by portfolio weighting are financials, health care and industrials. VIG also had a low turnover rate of 12% as of the end of January.
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Update 02/02/24: This story was previously published at an earlier date and has been updated with new information.
