5 ETFs Harnessing the Power of Income

by Tom Taulli | May 14, 2012 6:30 am

Mutual funds can be a great way to find strong yields, whether through dividends or interest on bonds. But if the expenses are too high, they can hang like a weight around the neck of the fund’s returns.

This is why an exchange-traded fund often makes the better option. ETFs usually rely on an index, and the costs are fairly low, leaving more yield for you. These benefits — as well as an increased investor aversion to risk — has had people flooding into fixed-income and dividend ETFs[1] as of late.

Of course, it’s certainly not too late to make your own move into these funds. Here’s five ETFs that harness the power of income:

iShares Dow Jones Select Dividend Index

The iShares Dow Jones Select Dividend Index (NYSE:DVY[2]) ETF, which has $10.2 billion in assets, tracks an index that focuses on the 100 highest-yielding stocks in the U.S., and the index is changed at the end of each year.

The companies held by DVY must meet certain requirements, such as in terms of earnings and dividend growth, and they must trade an average of 200,000 shares per day.

Some of the top holdings include dividend titans like Lorillard (NYSE:LO[3]), Lockheed Martin (NYSE:LMT[4]), Kimberly-Clark (NYSE:KMB[5]) and Chevron (NYSE:CVX[6]), which adds up to a current fund yield of 3.33% — an attractive level for a portfolio of larger companies. And the 0.4% expense ratio will hardly cut into that yield.

SPDR S&P International Dividend

The SPDR S&P International Dividend (NYSE:DWX[7]) ETF, like DVY, has a portfolio of the 100 highest-yielding stocks — but this time, of the international sort.

Also like DVY, the SPDR fund uses a variety of screens to maintain quality holdings. DWX has a number of requirements for its stocks, such as a total $1 billion minimum market cap, positive three-year earnings growth and profitability and three-month average daily value traded greater than $5 million.

Despite the troubles in the eurozone, DWX is rife with high-yield European holdings, including National Grid (NYSE:NGG[8]), Telecom Italia (NYSE:TI[9]) and France Telecom (NYSE:FTE[10]).

The yield on the SPDR S&P International Dividend fund is a hefty 6.37%, while the expenses are a low 0.45%.

SPDR Barclays Capital High Yield Bond

“Junk bonds” might seem like a bad investment — after all, these are fixed-income securities that have low credit ratings, and it’s not uncommon for them to go into default.

But as part of a diversified portfolio, junk bonds can be a great way to increase the overall yield. And a top ETF in the sector is the SPDR Barclays Capital High Yield Bond (NYSE:JNK[11]) fund, which sports a yield of 7.27%.

The portfolio tracks the Barclays Capital High Yield Very Liquid Index, which covers more than 220 bonds, and sports a 0.4% expense ratio.

PowerShares Emerging Markets Sovereign Debt

While risky, emerging markets can provide some nice opportunities to find yield. As the countries continue to grow, they should build stronger credit ratings and make fixed-income investments a good bet.

To play this trend, you might consider PowerShares Emerging Markets Sovereign Debt (NYSE:PCY[12]) ETF. It sports a yield of 5.15%, and the average duration is 8.6 years.

The fund includes bonds across 22 countries, which include interesting ones like Pakistan, Peru, Lithuania and Romania. The investments are also dollar-denominated, so there is no currency risk. Expenses are 0.5%.

iShares Barclays 20+ Year Treasury Bond

For those investors who want a safer fixed-income ETF, the iShares Barclays 20+ Year Treasury Bond (NYSE:TLT[13]) fund is a solid standard, yielding 3.27%. As its name implies, it holds U.S. Treasury bonds with a maturity of 20 or more years.

One of the benefits of this fund is its status as a “safe haven” — that is, if markets are in “risk-on” mode, investors traditionally will rush into Treasuries. It also sports a bargain-basement expense ratio of 0.15%.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”[14], “All About Short Selling”[15] and “All About Commodities.”[16] Follow him on Twitter at @ttaulli[17] or reach him via email[18]. As of this writing, he did not own a position in any of the aforementioned securities.

  1. flooding into fixed-income and dividend ETFs: https://investorplace.com/2012/05/income-etfs-led-aprils-fund-inflows/
  2. DVY: http://studio-5.financialcontent.com/investplace/quote?Symbol=DVY
  3. LO: http://studio-5.financialcontent.com/investplace/quote?Symbol=LO
  4. LMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=LMT
  5. KMB: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMB
  6. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  7. DWX: http://studio-5.financialcontent.com/investplace/quote?Symbol=DWX
  8. NGG: http://studio-5.financialcontent.com/investplace/quote?Symbol=NGG
  9. TI: http://studio-5.financialcontent.com/investplace/quote?Symbol=TI
  10. FTE: http://studio-5.financialcontent.com/investplace/quote?Symbol=FTE
  11. JNK: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNK
  12. PCY: http://studio-5.financialcontent.com/investplace/quote?Symbol=PCY
  13. TLT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TLT
  14. “The Complete M&A Handbook”: http://goo.gl/aLNDk
  15. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  16. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  17. @ttaulli: https://twitter.com/ttaulli
  18. email: mailto:tom@taulli.com

Source URL: https://investorplace.com/2012/05/5-etfs-harnessing-the-power-of-income/
Short URL: http://invstplc.com/1ny2l0M