Investors seeking stable cash flow without much work can turn to income exchange-traded funds, or ETFs. These funds invest in companies with higher-than-average dividend yields and manage the assets for you.
These ETFs also involve less investor effort than other passive income methods, such as rental income and product royalties. After doing the requisite research, of course, you just put your money into a fund and watch it generate income for the next eligible distribution.
Investors often gravitate toward these types of funds as they get closer to retirement and seek more financial stability.
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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 and aim for capital appreciation as a secondary objective.
Andy Wang, managing partner at Runnymede Capital Management, highlights the advantages 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.”
Sure, investors can buy their own dividend stocks, bonds and other income-producing assets. It’s possible to construct a portfolio that resembles the holdings of a fund or an index. However, you would then have to stay on top of each investment rather than having fund managers do it 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 income ETF may look attractive, but if that fund has an inconsistent distribution schedule and poor historical returns, it may not be the right choice. Each researched metric can offer 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.
Overall, investors have a wide variety of high-quality income ETFs to choose from. These are some of the very best:
| Income ETF | Expense ratio | Trailing-12-month yield* |
| iShares International Select Dividend ETF (ticker: IDV) | 0.51% | 6.6% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 0.06% | 3.4% |
| SPDR S&P Dividend ETF (SDY) | 0.35% | 2.6% |
| Vanguard High Dividend Yield ETF (VYM) | 0.06% | 3% |
| WisdomTree U.S. Quality Dividend Growth Fund (DGRW) | 0.28% | 1.7% |
| iShares iBoxx $ High Yield Corporate Bond ETF (HYG) | 0.49% | 5.8% |
| JPMorgan Equity Premium Income ETF (JEPI) | 0.35% | 7.9% |
| Vanguard Dividend Appreciation Index Fund ETF (VIG) | 0.06% | 1.8% |
*Source: Morningstar. Based on net asset value as of Feb. 29.
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 generous 5.9% 30-day SEC yield. The 12-month trailing yield is even higher, at 6.6%.
IDV has $4.2 billion in assets, with 92% of its money spread across 98 equity holdings. The fund’s top three positions are Rio Tinto Group (RIO), Mitsui O.S.K. Lines Ltd. (9104.T) and BHP Group Ltd. (BHP). These three equities make up more than 12% of the fund’s total assets.
Investors will receive outsized exposure to the financial services sector, which makes up 30.1% of the fund’s total assets. The three sectors with next-highest allocations, industrials (17.1%), utilities (13.7%) and basic materials (12.9%), make up a combined 44% of the portfolio.
IDV has returned an annualized 10% over the past 15 years, but in the past five years its return averages to about 4%. So the high-yield component is mostly what income investors are after with this one.
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 $54.1 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 four holdings are Broadcom Inc. (AVGO), AbbVie Inc. (ABBV), Home Depot Inc. (HD) and Merck & Co. (MRK), showing a little variety. Each of the fund’s top 10 holdings is around 5% of its total assets.
The top three sector concentrations are in industrials, health care and financials. These sectors combined encompass about half of the fund’s holdings.
SCHD has a 30-day SEC yield of 3.5% and a trailing-12-month yield of 3.4%. The fund has returned an annualized 12.6% over the past five years as of March 6.
SPDR S&P Dividend ETF (SDY)
The SPDR S&P Dividend ETF has more than $20 billion in assets under management, or AUM, and a 0.35% expense ratio. The fund uses the S&P High Yield Dividend Aristocrats Index as its benchmark, which means it only consists of dividend stocks that have increased their payouts for at least 20 consecutive years.
SDY is composed of 121 holdings and has a 30-day SEC yield of 2.6%, with a similar 12-month yield. Its top three holdings are 3M Co. (MMM), Realty Income Corp. (O) and Edison International (EIX). These three stocks make up about 6% of the fund’s total assets. The top three sector concentrations are industrials, consumer defensive and utilities, which make up more than half of the fund’s total positions.
As of March 6, SDY has a 10-year annualized return of 9.5%, with an even more impressive 15-year return of 14.8%. In recent years, however, the annual return has been lower, so this ETF is for buy-and-hold investors who value income from dividends.
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 a hair above 3%.
VYM tracks the FTSE High Dividend Yield Index, which has paid off for the passively managed fund over the past five years with a 10% annualized return. VYM spreads its funds across 450 stocks and has JPMorgan Chase & Co. (JPM), Broadcom and Exxon Mobil Corp. (XOM) in its top three holdings. These equities make up roughly 10% of the fund’s assets.
VYM concentrates on financial, consumer staples and health care holdings. There is also a sizable allocation to technology and industrial stocks. Although the top three sectors contain more than 48% of the fund’s assets, financials are doing the heavy lifting, with more than 21% of assets.
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
WisdomTree U.S. Quality Dividend Growth is a top-performing, $12.3 billion income ETF with a 14.4% annualized return over the past five years as of March 6. That top-shelf return also comes with a 1.7% 30-day SEC yield. DGRW has been especially hot over the past year, gaining 22.2% thanks to its heavy concentration in tech stocks.
The fund’s top three holdings are Microsoft Corp. (MSFT), Apple Inc. (AAPL) and Broadcom, which make up 16% of its portfolio. DGRW has 30% of its assets in technology stocks, followed by health care, industrials and financials at a combined 42% of the fund.
Rated five stars by Morningstar, DGRW has a reasonable 0.28% expense ratio for its attractive mix of price appreciation and dividend payouts.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
With $16.6 billion in AUM and a 0.49% expense ratio, iShares iBoxx $ High Yield Corporate Bond usually offers high yield in exchange for lower returns, though you’d never know it from its one-year return of 9.7%. The fund doesn’t have a five-year return that compares with some of the other funds on this list, however.
HYG prioritizes U.S. dollar-denominated high-yield corporate bonds and has a 7.3% 30-day SEC yield. The fund’s top issuer is Dish Network Corp. — which merged with Echostar Corp. (SATS) in December — as of March 4, but its assets are spread pretty thinly across its 1,200 bond holdings.
This fixed-income fund’s top three sectors are consumer cyclical, communications and consumer non-cyclical, composing roughly half of the fund’s total assets.
JPMorgan Equity Premium Income ETF (JEPI)
The JPMorgan Equity Premium Income ETF has a 0.35% expense ratio and a 30-day SEC yield of 6.8%. The trailing-12-month dividend yield is an even higher 7.9%. JEPI uses derivatives to increase the yield it offers investors. Its honed covered-call strategy aims to reduce risk while delivering high income.
JEPI has $32.9 billion in total assets that are spread across 137 investments, with only 16% of assets in its top 10 holdings. The fund’s top three stocks are Meta Platforms Inc. (META), Amazon.com Inc. (AMZN) and Trane Technologies PLC (TT), though none of these exceed 1.8% of the portfolio.
The fund does have a 47% sector concentration in information technology, financials and health care, though, with an 82% allocation to U.S. equities.
Vanguard Dividend Appreciation Index Fund ETF (VIG)
The Vanguard Dividend Appreciation Index Fund ETF has performed well compared to other income ETFs. The fund has a 12.8% annualized return over the past five years as of March 6, with a 14.8% annualized return over 15 years. In exchange, investors get a modest 1.7% 30-day SEC yield.
The fund uses the S&P U.S. Dividend Growers Index as its benchmark. VIG prioritizes large-cap stocks that have a record of consistently raising their dividends. The fund spreads its $77.1 billion in total assets across 318 holdings. The top three stocks in its portfolio are Microsoft, Apple and JPMorgan Chase.
VIG leans toward the information technology sector, which represents almost a quarter of the fund’s assets. The next-highest allocations are in financial, health care and industrial stocks.
As if the high return combined with steady dividends weren’t enough, VIG also has an ultra-low expense ratio of 0.06%.
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Update 03/07/24: This story was previously published at an earlier date and has been updated with new information.
