The chase for yield continues, and investors are searching far and wide for the kind of high yields they used to get from bonds and munis. But you don’t have to look too far. High yields are all over the place — stocks, exchange-traded funds and even mutual funds.
You do have to be willing to get aggressive. Investing with reduced risk is a centerpiece of my stock advisory newsletter, The Liberty Portfolio. But if you want to score truly high yield, you can’t just hide under a blanket.
The nice thing about high-yield ETFs, however, is that they give you an advantage over individual high-yield stocks: diversification. High income sometimes is linked to investments fraught with risk, but you can blunt that by investing in a package of these securities. That way, if one or even a few of them blow up, you won’t absorb the full pain.
Another bonus: Many ETFs delve into the thick-dividend world without strangling you on fees.
Here’s a look at seven high-yield ETFs for those who are willing to get their hands dirty in the search for big income.
Aggressive Income ETFs: UBS ETRACS Linked to the Wells Fargo Business Development Company Index ETN (BDCS)
Dividend Yield: 8.09%
Expenses: 0.85%, or $85 annually on every $10,000 invested
The UBS ETRACS Linked to the Wells Fargo Business Development Company Index ETN (NYSEARCA:BDCS) almost has as many words in its name as holdings in its portfolio, at 40 business development companies (BDCs).
BDCs invest several million dollars in middle-market businesses — companies that need growth capital but don’t have access to banks’ more stringent underwriting. These companies borrow money at low rates and lend it out in the 9%-14% range, so they earn a nice spread. Best of all, they have to spin off at least 90% of their taxable earnings back to shareholders, so they’re high-yield candy.
Top holdings at the moment include Prospect Capital Corporation (NASDAQ:PSEC) and Ares Capital Corporation (NASDAQ:ARCC). But not all 40 holdings are winners, and that’s why having diversification matters.
Aggressive Income ETFs: YieldShares High Income ETF (YYY)
Dividend Yield: 7.97%
Expenses: 1.72% (includes 122 basis points in acquired fund fees)
The YieldShares High Income ETF (NYSEARCA:YYY) is kind of a cheat, because it should market itself as what it really is: a basket of high-income closed-end funds (CEFs).
CEFs are a lot like mutual funds, in that a manager puts one together to focus on a specific type of investment, then rolls it out via an IPO to raise the money to make those investments. Unlike a mutual fund, though, it has a fixed number of shares, and it trades on an exchange more like a stock.
A few high-yield ETFs invest in CEFs. YieldShares’ YYY specifically invests in 30 such funds to achieve an approximately 75-25 blend on bonds and stocks. Expenses are high as a result, but that’s in part because of fees already taken out of the closed-end funds’ performance. YYY itself only charges 0.5% in annual expenses.
Like many CEFs, there isn’t much movement in YYY’s price. It’s all about the dividends, and this one presently yields close to 8%.
Aggressive Income ETFs: PowerShares CEF Income Composite Portfolio (PCEF)
Dividend Yield: 6.99%
Expenses: 2.02% (includes 152 basis points in acquired fund fees)
Think of the PowerShares CEF Income Composite Portfolio (NYSEARCA:PCEF) as a more conservative version of YYY. It has returned about the same, as far as fund NAV pricing goes, since inception of both.
However, PCEF has two differences.
First, it is far more diversified, holding 141 securities at the moment. Second, this fund pays about a percentage point less — all that diversification tamps down yield a big, but does make it a safer way to play CEFs. It also has a much lower standard deviation — 7.7 vs 10.55 for YYY — which means less volatility, and therefore a more prudent choice for the less-aggressive investor.
Aggressive Income ETFs: Global X SuperDividend ETF (SDIV)
Dividend Yield: 6.59%
The Global X SuperDividend ETF (NYSEARCA:SDIV) yields well more than 6%, which is pretty high for what is essentially a standard international dividend stock fund.
The reason for the sizable income is that Global X scours the globe specifically looking for the highest yields possible. I dig this ETF because it has found some oddball stocks that are really quite interesting, such as Greek Organisation of Football Prognostics SA (OTCBB:GRKZF). This is essentially a legal Greek company that handles lottery, sports and horse race better, and other games.
SDIV also invests in a French utility, a Kiwi airline, and an Aussie media company, just to name a few.
Aggressive Income ETFs: SPDR Dow Jones International Real Estate ETF (RWX)
Dividend Yield: 8.31%
SPDR Dow Jones International Real Estate ETF (NYSEARCA:RWX) yields a very impressive 8%, with a portfolio consisting of exactly what its name says — real estate. Weirdly, this sets RWX apart, because despite the high-income nature of REITs, many REIT ETFs throw off yields of just 3% or 4%.
With about 110 holdings, RWX is just diversified enough so you can sleep well at night, and has significant geographical diversification too. Most major developed nations are represented, with real estate holdings of all different kinds peppering the prospectus.
The standard deviation is uncomfortably high — almost 20 — but this is the price you pay as an aggressive investor seeking yield. You are going to have to stick out the volatility to collect that hefty yield.
Aggressive Income ETFs: Global X SuperIncome Preferred ETF (SPFF)
Dividend Yield: 6.94%
Global X SuperIncome Preferred ETF (NYSEARCA:SPFF) goes after my favorite type of security, particularly in a low-rate environment: preferred stocks.
Companies issue preferred stock to raise capital. It’s lodged in between bonds and stocks in the capital stack, trades more like a bond, and yields more like a investment grade bond.
They are mostly issued by financial companies, and SPFF is no exception as far as its holdings. You see the likes of Wells Fargo & Co (NYSE:WFC) and Citigroup Inc (NYSE:C) in here. The yield of 7% is generous, and SPFF historically has one of the lowest standard deviations I’ve ever seen, at about 4.4 over the past three years.
Aggressive Income ETFs: SPDR Bloomberg Barclays Short-Term High-Yield Bond ETF (SJNK)
Dividend Yield: 0.4%
SPDR Bloomberg Barclays Short Term High Yield Bond ETF (NYSEARCA:SJNK) is also a rather risky choice with a deceptive name.
The “short-term bond” name may lead you to think this is a government bond fund, but if that were the case, there’s no way it would have a 5% yield. No, this is an ETF that invests in corporate debt that is below investment grade.
Honestly, I’m not a fan of junk bonds right now, because if you take a look, this ETF is 92% invested in energy, and many energy companies are struggling under debt loads with danger of default.
But other investors are more willing to take on junk’s baggage, and with SJNK, the short-term nature of those bonds at least reduces default risk.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. As of this writing, he was long BDCS. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.