Well, the Federal Reserve didn’t do any favors for income seekers this week. By keeping rates at just 0.50%, any hopes of finding a high yield in traditional income products — CDs, money markets or Treasury bond exchange traded funds — was quickly dashed. Therefore, in order to find a high yield, investors need to continue to step outside the box into some unfamiliar territory.
Luckily, the ETF boom has made the task of finding a high yield pretty easy. There is now a multitude of bond ETFs tracking a whole host of different fixed-income asset classes — many of which come with a high yield.
And with the Fed kicking the can down the road a few more months — perhaps even for all of 2016 — adding a few of these bond ETFs could do your portfolio a world of good. It’ll certainly boost your income over the measly 1.9% you can get via the iShares 7-10 Year Treasury Bond ETF (IEF) and intermediate Treasury bonds.
Here are three high yield bond ETFs to buy for big income.
High-Yield Bond ETFs to Boost Income: Market Vectors Fallen Angel Bond ETF (ANGL)
Dividend Yield: 7.4%
Expense Ratio: 0.40%, or $40 per $10,000 invested
Just like you and I, companies have “credit scores.” And various factors can affect these ratings.
Companies that have run into trouble and seen their debt rating fall from investment grade to junk status often face higher borrowing costs and bigger coupon payments on their bonds. For investors, it can be an opportunity to pick up some high yield bonds without adding that much more risk.
These bonds are called “Fallen Angels” and the Market Vectors Fallen Angel High Yield Bond ETF (ANGL) is the only fund that tracks these former investment-grade bonds.
ANGL predominantly holds bonds that are rated BB. That’s just one step below investment grade. That means that the 245 different now-junk bonds in ANGL are actually pretty strong bonds with decent credit quality. According to FactSet data, fallen angel bonds have managed to outperform regular junk bonds in 9 out of the last 12 years. However, being in that junk category — albeit only slightly — means that these bonds will have a high yield.
For investors, ANGL could be the best of both worlds — a high yield and some relative safety.
High-Yield Bond ETFs to Boost Income: PowerShares CEF Income Composite ETF (PCEF)
Dividend Yield: 8%
Expense Ratio: 1.94%
Closed-ended funds are widely misunderstood and ignored by investors. After an initial IPO, a set number of shares trade throughout the day like stocks. The beauty is that many times a CEF will trade a discount to its net-asset value. Meaning, investors can often pick up stocks, bonds or whatever at big discounts and at a high yield.
The vast bulk of CEFs are bond-related and the PowerShares CEF Income Composite ETF (PCEF) is the best way to buy them all.
PCEF tracks 145 different CEFs in the taxable bond categories as well as CEFs using an equity option writing strategy. However, this is very much a bond ETF, as just over 70% of its portfolio is in bonds. The key for the high yield ETF is that its underlying index screens for those CEFs that are trading at discounts to their NAVs. PCEF’s current underlying portfolio of funds is trading at an average discount to NAV of 7.45%. Being able to buy bonds at 7.45% off is nothing to sneeze at.
More impressively is that the combination of high-yield bonds plus that discount to value helps PCEF churn out a whopping 8% dividend yield. Even better is that the ETF pays its dividend monthly.
Expenses for PCEF are a bit high at 1.94%, but that is mostly due to an accounting quirk related to acquired fund fees and expenses.
High-Yield Bond ETFs to Boost Income: iShares Emerging Markets High Yield Bond ETF (EMHY)
Dividend Yield: 6.5%
Expense Ratio: 0.50%
Emerging market bonds have often been a great place for investors to snag a high yield. After all, lending to a place like Turkey or a firm like Petroleo Brasileiro SA Petrobras (PBR) isn’t exactly like lending Uncle Sam some coin.
There’s plenty of risk there. But there can also be plenty of reward.
Speaking of which, that reward comes as a 6.5% yield from the iShares Emerging Markets High Yield Bond ETF (EMHY).
EMHY tracks junk bonds issued by emerging market nations and corporations. That sounds risky — and it is. However, there are some benefits from using the bond ETF.
First, EMHY holds nearly 300 different emerging market junk bonds from over 20 different countries. Secondly, it’s roughly split between corporate and sovereign debt. Both of these facts add plenty of diversification benefits and reduce the potential for complete blowups. Finally, this bond ETF tracks bonds that are denominated in U.S. dollars. That eliminates much of the currency hassles with failing emerging market currencies.
By using EMHY, investors gain access to a rather risky sector of the fixed-income world, while reducing some of the issues with owning it. Investors are compensated of the risk with a high yield.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.