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 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.
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 target 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 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, along with their trailing-12-month yields:
| Income ETF | Yield (TTM) as of April 29* | 5-year annualized return** | Expense ratio |
| iShares International Select Dividend ETF (ticker: IDV) | 6.6% | 4.3% | 0.51% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 3.3% | 11.6% | 0.06% |
| SPDR S&P Dividend ETF (SDY) | 2.5% | 7.9% | 0.35% |
| Vanguard High Dividend Yield ETF (VYM) | 2.8% | 9.5% | 0.06% |
| WisdomTree U.S. Quality Dividend Growth Fund (DGRW) | 1.6% | 13.2% | 0.28% |
| iShares iBoxx $ High Yield Corporate Bond ETF (HYG) | 5.7% | 2.7% | 0.49% |
| JPMorgan Equity Premium Income ETF (JEPI) | 7.6% | 7.6%*** | 0.35% |
| Vanguard Dividend Appreciation ETF (VIG) | 1.8% | 11.5% | 0.06% |
*Source: Morningstar, fund companies.
**By net asset value (NAV) as of April 29. ***3-year return (longest available).
iShares International Select Dividend ETF (IDV)
The iShares International Select Dividend ETF prioritizes high-dividend stocks in non-U.S. developed markets. It’s a useful fund for investors who want to generate dividend income away from the U.S. Most of the corporations in this fund are located in Europe, with the U.K., Italy and Spain leading the way. The fund also has a 0.77 beta, which makes it less volatile than the S&P 500.
The fund has a 0.51% expense ratio and a generous 5.8% 30-day SEC yield. The 12-month trailing yield is even higher, at 6.6%.
IDV has $4.1 billion in assets, with its capital spread across about 158 holdings, the majority of those being equities. The fund’s top three positions are British American Tobacco PLC (BTI), Total Energies SE (TTE) and BHP Group Ltd. (BHP). These three equities make up more than 11% of the fund’s total assets.
Investors will receive outsized exposure to the financial services sector, which makes up 30.9% of the fund’s total assets. The three sectors with next-highest allocations, utilities (15.3%), communications (11.4%) and materials (10.3%), compose a combined 37% of the portfolio.
IDV has returned an annualized 4.3% by net asset value over the past five years. 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 about 103 securities. The fund has $54.3 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 Chevron Corp. (CVX), Texas Instruments Inc. (TXN), Lockheed Martin Corp. (LMT) and PepsiCo Inc. (PEP).
SCHD goes through plenty of changes and currently has a 28% portfolio turnover rate. None of the top four stocks from a few months ago are currently in the top 10 holdings. Each of the fund’s current top 10 holdings is about 4% of its total assets.
The top three sector concentrations are in financials, health care and consumer staples. These sectors combined encompass about half of the fund’s holdings.
SCHD has a 30-day SEC yield of 3.8% and a trailing-12-month yield of 3.3%. The fund has returned an annualized 11.6% over the past five years as of April 29.
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. Those are the same top three positions from several months ago, which indicates less turnover. The top three sector concentrations are industrials, consumer staples and utilities, which make up more than half of the fund’s total positions. As of April 29, SDY has a 10-year annualized return of 9.4%.
SSGA Funds Management oversees SDY. The firm manages more than $4.1 trillion in assets, which includes $2.8 trillion in assets from institutional clients. Global Equity Beta Solutions is the fund’s management team. John Tucker is the executive vice president and chief investment officer of Global Equity. He oversees roughly 80 portfolio managers and has been working for State Street since 1988.
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. It’s no surprise to see the Vanguard fund showcasing a low expense ratio. Most of the brokerage firm’s funds don’t cost much to own. Furthermore, the fund has a 30-day SEC yield of 2.8%, with a similar 12-month trailing yield.
VYM tracks the FTSE High Dividend Yield Index, which has paid off for the passively managed fund over the past five years with a 9.5% annualized return. VYM spreads its funds across 557 stocks and has JPMorgan Chase & Co. (JPM), Broadcom Inc. (AVGO) 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, industrials and health care holdings, but there is also a sizable allocation to technology stocks. Although the top three sectors contain more than 45% of the fund’s assets, financials are doing the heavy lifting, with more than 20% of assets.
Gerard C. O’Reilly is the principal portfolio manager for VYM, and he has advised the fund since 2016. O’Reilly has deep experience in managing Vanguard stock index portfolios, tracking back to 1994.
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
WisdomTree U.S. Quality Dividend Growth is a top-performing, $12.5 billion income ETF with a 13.2% annualized return over the past five years as of April 29. That top-shelf return also comes with a 1.6% 30-day SEC yield. DGRW has been especially hot over the past year, gaining 18.7% 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 29% 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. Mellon Investments Corp. and WisdomTree Asset Management co-manage the fund. Marlene Walker-Smith has the most seniority and has been on the fund’s management team since Oct. 26, 2020.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
With $14.3 billion in total assets 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 9.9%. 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 7.6% 30-day SEC yield. The fund’s top issuer is CCO Holdings as of April 29, but HYG’s assets are spread pretty thinly across more than 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. More than two-thirds of the fund’s positions mature within three to seven years. HYG has a 0.44 beta, which is lower than most income funds. The low beta makes its price less sensitive to day-to-day market movements.
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 7.6%. 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 $33.1 billion in total assets that are spread across 133 investments, with only 16% of assets in its top 10 holdings. The fund’s top three stocks are Trane Technologies PLC (TT), Progressive Corp. (PGR) and Microsoft, though none of those exceed 1.8% of the portfolio.
However, most of the fund’s assets are allocated into three sectors: information technology, financials and industrials, which make up about 40% of the fund’s total assets.
Hamilton Reiner and Raffaele Zingone are the fund managers, who have been at the helm of JEPI since the fund’s inception on May 20, 2020.
Vanguard Dividend Appreciation ETF (VIG)
The Vanguard Dividend Appreciation ETF has performed well compared to other income ETFs. The fund has an 11.5% annualized return over the past five years as of April 29, with a 13.1% annualized return over 15 years. In addition, 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 $76.5 billion in total assets across 343 holdings. The top three stocks in its portfolio are Microsoft, Apple and Broadcom.
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%. The fund’s two managers, Walter Nejman and the aforementioned Gerard C. O’Reilly, have led the fund since May 25, 2016.
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