The search for high-yielding ETFs can be an interesting exercise in price movement and risk dynamics. After all, the funds with the largest expected dividend streams are usually in that category because of relative underperformance or above-average risk behavior.
That doesn’t mean these funds should be shunned because of their sky-high income — rather, they should be carefully researched and implemented in the proper environment to maximize total return.
Income investors can use these tools in the context of a low-cost, diversified and balanced portfolio to enhance their existing monthly or quarterly dividends.
Screening the 52 available ETF offerings at Vanguard by their current 30-day SEC yield revealed a wide array of asset classes and sectors. The following funds were filtered to the top of the stack, but remember that this list will change over time as market conditions evolve.
High-Yielding ETFs: Vanguard Emerging Markets Government Bond ETF (VWOB)
Click to Enlarge The Vanguard Emerging Markets Government Bond ETF (NASDAQ:VWOB) is the highest income-producing ETF at Vanguard, with a yield of 4.82% right now.
This fund invests in nearly 800 U.S. dollar-denominated debt securities of emerging market nations such as Brazil, Russia, Mexico and China. All of the underlying holdings are sovereign debt and the portfolio has an average duration of 6.6 years.
VWOB was introduced in mid-2013 and was designed to compete with the category leader iShares JP Morgan USD Emerging Market Bond ETF (NYSEARCA:EMB), which has more than $4.2 billion in total assets. One of the distinct advantages of VWOB is its best-in-class 0.35% expense ratio that is far lower than the 0.60% charged by EMB.
In addition, the Vanguard product has a much broader overall diversification across numerous countries and holdings.
An ETF of this nature can be used to focus a portion of your income portfolio towards foreign bonds with a much higher yield than U.S. equivalents. While this stronger income stream comes with a consummate higher risk level, it also provides an opportunity for capital expansion in emerging market nations.
Income from VWOB is paid on a monthly basis and this fund has gained 4.66% in total return over the last year.
High-Yielding ETFs: Vanguard Long-Term Corporate Bond ETF (VCLT)
Click to Enlarge The Vanguard Long Term Corporate Bond ETF (NASDAQ:VCLT) comes in second on the list of top income-producing Vanguard ETFs with a yield of 4.18%. This fund invests in nearly 1,500 long-dated corporate bonds of primarily investment grade issuers.
The reason for the hefty yield is that VCLT has an average effective maturity of 23.7 years, which means it’s highly susceptible to changes in interest rates.
The principle at work here is that the farther out on the yield curve that you go, the higher associated yield you are paid in compensation for the risk. VCLT is actually a very appropriate play in a falling interest rate environment that is supportive of high quality corporate debt.
This ETF has more than $1.4 billion in total assets, charges an expense ratio of just 0.12%, and also pays income on a monthly basis. Over the last year, VCLT has gained just more than 15% in total return as long-term interest rates have nosedived lower.
This is certainly not a fund that you want to own in a rising rate environment, but it does have applications as a way to balance out equity or junk bonds within a diversified income portfolio.
High-Yielding ETFs: Vanguard Telecommunication Services ETF (VOX)
Click to Enlarge Telecommunication stocks have long been known for their steady business models and high rate of cash flow to shareholders. The Vanguard Telecommunications Services ETF (NYSEARCA:VOX) incorporates 29 individual telecom stocks, with the top holdings being industry conglomerates AT&T Inc (NYSE:T) and Verizon Communications Inc (NYSE:VZ).
Each of these two stocks represents 21% of the underlying assets allocation — or 42% combined weighting in the ETF.
VOX has a 30-day SEC yield of 3.40% and income is paid just once a year (in December) as a lump sum distribution to shareholders. This fund has more than $960 million in total assets and charges an expense ratio of 0.12%.
Telecommunication stocks struggled to keep pace with the market in 2014, but have jumped out of the gate strongly to start 2015. Over the last year, VOX has gained 11.3% in total return despite some above-average volatility that weighed on momentum.
Despite the somewhat unconventional income style and concentrated nature of the index, VOX can be appropriate for investors seeking to access the underlying stocks in the telecom sector through a low-cost vehicle.
Disclosure: The Vanguard Long-Term Bond ETF (NYSEARCA:BLV) is actually the third-highest yielding Vanguard ETF at 3.57%, but because it follows closely in the footsteps of VCLT, I chose to highlight VOX (fourth on the list) as an equity-income play.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. As of this writing, some of his clients owned shares of EMB. To get more investor insights from FMD Capital, visit his blog.
