High-yield dividend ETFs offer a way to capture a larger stream of income with less risk than an individual stock or bond — but pitfalls remain. After all, exchanged-traded funds are no different from individual stocks or bonds when it comes to fat payout percentages. It’s almost always an indicator of heightened risk for a high-yield dividend ETFs.
The downside is that income investors — like savers — are going to have to wait longer for a tightening cycle that pulls interest rates up from near-historical lows.
That makes high-yield dividend ETFs look mighty tempting on the face of it. Some of the biggest payers among high-yield dividend ETFs have yields easily ranging in the double digits.
But that doesn’t mean these high-yield dividend ETFs are automatic buys. From expense ratio to payout risk to interest rate risk, high-yield dividend ETFs have any number of ways to let an investor down. That’s why it’s important — as always — to know what you’re buying with a high-yield dividend ETF.
To get a sense of what’s available out there, we put together a short list of the best high-yield dividend ETFs.
We restricted our screen to funds with assets under management of at least $1 billion and a three-month daily average volume of $1 million or more. They’re sorted by 12-month yield.
These names are by no means automatic buys, but they do warrant a closer look.
High-Yield Dividends: iShares MSCI Australia Index Fund (ETF) (EWA)
Expenses: 0.48%, or $48 per $10,000 invested
It’s a mixed picture for the iShares MSCI Australia Index Fund (ETF) (EWA). Single-country ETFs are on the riskier side, and Australian companies have significant exposure to a Brexit.
On the other hand, Australia’s economy is expanding at a faster-than-expected rate. Like its U.S. counterpart, the nation’s central bank is content to maintain the status quo on rates until it has better visibility.
It’s also reassuring that banks — which are the biggest portfolio in EWA — have solid asset bases.
With expenses running at 0.48%, EWA is in the middle of the pack for high-yield ETFs that meet our criteria.
On a price basis, EWA is essentially up about 3% for the year-to-date, vs. a 2.3% rise in the S&P 500.
High-Yield Dividends: SPDR Barclays Short Term High Yield Bond ETF (SJNK)
Rising prices for crude oil and a generalized market shift toward riskier assets has the SPDR Barclays Short Term High Yield Bond ETF (SJNK) flying. SJNK is up 6.25% on a total return basis year to date.
The downside is that the rally in the sector might already be running out of steam.
The junk bond market has extensive exposure to the energy sector, which is still struggling despite the recent rally in oil prices.
It’s also disconcerting that oil prices might have reverted to a downtrend.
On the plus side, SJNK has an expense ratio of just 0.4%, which is on low end of the ETFs in this survey. The Fed also did investors the fund a favor when it extended the timetable for a rate hike.
High-Yield Dividends: iShares iBoxx $ High Yid Corp Bond (ETF) (HYG)
The iShares iBoxx $ High Yid Corp Bond (ETF) (HYG) is one of the most popular junk bond ETFs. With an average daily volume of 11.7 million shares, investors have no fear of the liquidity risk associated with obscure ETFs.
Like other high-yield bond products, HYG is having a happy year. On a total return basis it’s up 5.7% for the year-to-date. However, expenses of 0.5% make it somewhat pricey.
But, as always, investors need to approach high-yield ETFs cautiously. There’s a reason why ETF sponsors are rolling out niche junk bond funds that exclude energy holdings.
Oil prices remain a wildcard and are still below $50 a barrel. It’s important because most U.S. shale drillers have breakeven points below (or well below) that level.
High-Yield Dividends: iShares S&P US Pref Stock Idx Fnd (ETF) (PFF)
Preferred stocks are a hybrid of stocks and bonds that have some special features, and the iShares S&P US Pref Stock Idx Fnd (ETF) (PFF) is the biggest of its kind.
The good news for PFF and other preferreds is that the dividend is often cumulative, so if the company misses a payment, it has to make it up later. They’re usually tax advantaged too.
On the other side, they have interest rate and credit risk. More than half of PFF’s portfolio is indexed to financial-sector stocks. Make of that what you will.
Additionally, like all preferreds, PFF has limited upside because of redemption risk, which means issuers retain the right to call them. Expenses of 0.47% aren’t out of line.
High-Yield Dividends: SPDR Barclays Capital High Yield Bnd ETF (JNK)
The SPDR Barclays Capital High Yield Bnd ETF (JNK) almost looks like a twin of HYG, but it has some noticeable differences.
For example — they trade essentially in line with each other, but JNK has a history of lagging HYG over the longer term. The have comparable average daily volume. JNK is a bit smaller by roughly $1 billion. JNK’s portfolio skews more toward junk bonds with shorter maturities than HYG’s does.
The most salient distinction comes when looking at yields and expenses. JNK has a significantly higher yield for the last 12 months vs. HYG. It’s also cheaper, with expenses coming to 0.4%.
HYG and JNK serve the same function in a portfolio. Choosing between them is hardly a life-changing decision.
High-Yield Dividends: Alerian MLP (AMLP)
This is where things get interesting. As a master limited partnership ETF, Alerian MLP (AMLP) has to give at least 90% of its income to investors. As with REITs (real estate investment trusts), this makes them very appealing to anyone who’s starving for yield.
Just be forewarned that this is an energy sector MLP. It tracks oil and gas pipeline companies. Pipeline stocks were supposed to hold up relatively well during the rout in oil prices. Didn’t happen.
As the sector and yield would suggest, AMLP is on the riskier side of the equation. But, oh, what a yield. It comes at a price, however, with expenses on the pricier side at 0.85%.
Intriguingly, the pipeline subsector is having an enviable 2016. AMLP is up 9.5% YTD.
High-Yield Dividends: iShares FTSE NAREIT Mortg.REITIn Fd(ETF) (REM)
If you thought pipeline MLPs were relatively risk, get a load of this — iShares FTSE NAREIT Mortg.REITIn Fd(ETF) (REM) tracks the U.S. real estate market.
REM tracks an index of REITs that hold residential and commercial mortgages. REIT ETFs can pay very high dividends but they’re also more sensitive to rate risk. When rates rise, mortgages get more expensive, tampering demand.
But it’s the way REITs make hay that gives them more rate risk than most. Companies use short-term debt to finance their purchases and make money on the spread. In other words, they live and die by the yield curve.
The expense ratio is in the middle of the pack for a high-yield ETF.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.