One of the many reasons income ETFs have become all the rage in the stock market is the ease with which one can obtain both dividends and diversification in a given sector, or even across the entire market.
The protection afforded by diversification cannot be underemphasized. While a given sector can get hammered and an ETF along with it, broadly diversified ETFs — particularly those offering good dividend yields — will often be able to sustain just about anything short of a market crash.
In hunting for the safest income ETFs I could find, I wanted to find funds that were not only broadly diversified but also offered average to above-average yields.
There’s nothing wrong with your standard large-cap income ETF — they have a place in most portfolios. But if you can take advantage of something that offers both diversification and high yield … why wouldn’t you?
Here’s a look:
Income ETFs – PowerShares S&P 500 High Dividend Portfolio (SPHD)
Dividend Yield: 3.4%
The PowerShares S&P 500 High Dividend Portfolio (SPHD) has a lot going for it as income ETFs go.
For starters, the ETF has relatively low volatility, which is what one would hope from a fund tracking the S&P 500 Low Volatility High Dividend Index. This index tracks 50 stocks with about a quarter of them allocated to utilities. It is otherwise diversified into only large- and mid-cap stocks, of which roughly two-thirds are in my favorite style: value. That creates even more opportunity for upside.
There are plenty of holdings to like in SPHD, including Health Care REIT (HCN) and FirstEnergy Corporation (FE), while current top holding Pepco Holdings (POM) recently agreed to a buyout offer from No. 3 holding Exelon (EXC).
Meanwhile, the fund yields well more than 3% while costing a lean 0.3%, or $3 for every $1,000 invested, in expenses.
Income ETFs – Global X SuperDividend ETF (SDIV)
Dividend Yield: 6.1%
One income ETF with a name to die for is Global X SuperDividend ETF (SDIV).
But what I really like here is the international diversity that SDIV provides, along with fabulously diverse sector holdings.
The ETF carries roughly 100 stocks, which are spread out over North America (35%), Europe (21%), Australasia (19%), Asia (10.28%) and others. The sectors are spread wide, with real estate at 26%, financial services at 23%, telecom and utilities with about 12% each, and positions in energy, industrials, tech, consumer and healthcare.
Meanwhile, SDIV is an equal-weight ETF, which I prefer to cap-weighting because it smooths out volatility, and pays a monster dividend yield of 6%-plus. And you’re not getting swindled on that income, as the fund only charges 0.58% in fees.
Income ETFs – SPDR Dow Jones International Real Estate ETF (RWX)
Dividend Yield: 4.5%
Real estate is always going to be a valued asset because … well, it’s tangible. As such, the SPDR Dow Jones International Real Estate ETF (RWX) holds an important place in the market.
RWX eschews US equities, giving you international exposure as follows: 21% Japan, 14% U.K. 13% Australia, 10% each in Hong Kong, Canada and France, with 13 other nations represented.
Holdings include Japanese real estate developer Mitsui Fudosan, the massive mall owner Westfield Group (WFGPY) and big real estate player Brookfield Asset Management (BAM).
RWX throws off a 4.5% while charging 0.59% in expenses.
Income ETFs – iShares U.S. Preferred Stock ETF (PFF)
Dividend Yield: 6.5%
The last income ETF is one of my favorites, and it’s one that I’ve written about before.
The iShares U.S. Preferred Stock ETF (PFF) offers a diversified group of stock-bond “hybrids” known as preferred shares. I love preferred stock because it has a higher place in the capital stack than common shares of a stock. If the company gets into trouble, you have a greater chance of coming out whole than if you hold the common, which is often wiped out. Also, common stock dividends must be suspended before preferred stock.
Preferred stock tends to trade in a very tight range like bonds do, yet provide substantial dividend yields.
This income ETF is skewed towards very solvent financials, and yields 6.5%. Expenses run at 0.48%.
As of this writing, Lawrence Meyers was long PFF. He is president of Asymmetrical Media Strategies, a crisis PR firm, and PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.