Exchange-traded funds are great for a lot of things — diversification, easy-to-understand access to difficult-to-understand areas of the market, and cheap exposure to just about every kind of investment you could possibly want. But on the whole, there aren’t a lot of great ETF options if you like high yield.
ETFdb covers a universe of 2,002 ETFs at the moment, and of that number, just 337 (roughly 17%) yield more than 3%, and a paltry 117 (about 6%) clear the 5% mark. Worse: The real figures are actually smaller than those, as a number of those yields are thrown off by big one-time dividends and other data issues.
All of this is a long way of saying that there aren’t a ton of high-yield ETFs to choose from.
But there are some, and amid that small field are a few winners that offer substantial yields for just about any kind of risk appetite out there. The question is: How far are you willing to stretch for income?
Today, we’ll look at three high-yield ETFs that tackle three different areas of the market, ranked from low risk to high risk. And their payouts scale accordingly, ranging from nearly 6% to as high as 16%. In order of yield …
High-Yield ETFs: VanEck Vectors Preferred Securities ex Financials ETF (PFXF)
Type: Preferred Stock
Expenses: 0.41% (includes 8-basis point fee waiver)
Preferred stocks aren’t entirely without risk, but they’re one of the safest possible sources of high yield.
Preferred stocks are often referred to as stock-bond “hybrids” because they possess some attributes of stocks and some attributes of bonds. For instance, a preferred stock will trade on an exchange just like any other common stock, and it represents ownership in the company. However, like bonds, they don’t actually carry voting rights.
And also like bonds, preferred stocks will typically pay a fixed (though very high, between 5% and 7%) dividend based on a par rate that’s assigned when the shares are issued. If that sounds like bonds and their coupon payments, that’s because they’re very similar. They also tend to trade in a band around their par value, meaning there’s extremely little volatility compared to common stocks.
The VanEck Vectors Preferred Securities ex Financials ETF (NYSEARCA:PFXF) is one of a handful of high-yield ETFs that invest in this particular type of asset. PFXF takes the “safety play” angle one step further, though, by excluding the preferred shares of companies in the financial sector. (You’ll be unsurprised to learn that PFXF launched a couple years after the financial crisis.)
Instead, this ETF has about 30% of its holdings in utilities like NextEra Energy Inc (NYSE:NEE), 27% of its assets in real estate investment trusts like VEREIT Inc (NYSE:VER), 15% in telecoms like T-Mobile US Inc (NASDAQ:TMUS) and the rest spread across other industries and sectors.
PFXF offers a high 5.7% yield for a dirt-cheap 0.41% — or $41 annually on every $10,000 invested — in expenses.
High-Yield ETFs: Alerian MLP ETF (AMLP)
Expenses: 1.42% (includes 57 basis points of deferred income tax expense)
Master limited partnerships (MLPs) are a type of business structure that trades off certain tax benefits (such as exemption from federal taxes) in exchange for doling out large percentages of their income in the form of dividend-like “distributions.”
While a number of industries can use the MLP organization, the majority of these tend to fall in the energy sector — usually dealing with energy transportation such as pipelines, as well as storage and other services.
The Alerian MLP (NYSEARCA:AMLP) ETF is the largest MLP-focused ETF on the market, at more than $10 billion in total net assets. The fund holds 27 different MLPs at the moment, with the heaviest weights going to Enterprise Products Partners L.P. (NYSE:EPD), Magellan Midstream Partners, L.P. (NYSE:MMP) and Energy Transfer Partners LP (NYSE:ETP), all at about 10% of the fund’s assets.
Many MLPs are referred to as “toll takers” because they merely operate pipelines, thus energy price fluctuations really shouldn’t matter as long as people are consuming gas. But the stocks certainly don’t react that way, and MLPs have taken a licking in 2017 amid a return to sliding oil and natural gas prices.
Thus, AMLP has a considerable amount of risk as it relates to energy prices. And, because it directly invests in MLPs, it can be a headache come tax time.
But the high yields and the nature of these partnerships’ businesses do help mitigate the risk and make this high-yield ETF a decent play for somewhat aggressive income hunters.
High-Yield ETFs: ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index ETN (BDCL)
Now, you wanna get nuts? Let’s get nuts.
Business development companies are a particularly useful niche in the corporate world, created in 1980 to help American businesses create jobs and grow by providing lending to smaller, up-and-coming businesses. Essentially, where the big banks won’t lend, BDCs step in and offer financing, as well as consulting and even operational help.
BDCs are free from income taxes, but like REITs, they must pay out at least 90% of all taxable income to shareholders in the form of (really big) dividends. For instance, the ETRACS Linked to the Wells Fargo Business Development Company Index ETN (NYSEARCA:BDCS) fund yields a healthy 8.1% at the moment.
But if you really want to get aggressive and chase astronomical yields, the 2xLeveraged Long Wells Fargo Business Development Company Index ETN (NYSEARCA:BDCL) is the play to make.
The BDCL — which as an exchange-traded note doesn’t actually hold any assets, but instead is a debt product that tracks an index to provide its returns — follows the same index as the BDCS. Thus, it lives and dies on the returns of companies such as Ares Capital Corporation (NASDAQ:ARCC), FS Investment Corporation (NYSE:FSIC) and Prospect Capital Corporation (NASDAQ:PSEC).
But the BDCL actually aims to produce twice the daily returns (and dividends) of the index — allowing you to double your gains, but potentially double your losses. This is a dangerous strategy no matter what, but the one saving grace is that this leveraged ETN’s dividend is so large that it can really smooth out some of its shallower lulls. As a result, BDCL has beaten BDCS in total returns over the past one-, three- and five-year periods.