The advent of exchange-traded funds, especially high-yield ETFs, in the stock market offered investors with some of the best ways to create a diversified portfolio. ETFs offer mutual fund strength diversification, and spreading that risk creates more safety, up to a point.
High-yield ETFs are attractive for retirement investors. In retirement, as risk appetite declines while the need for income increases, high-yield ETFs can fit the bill.
The goal for high-yield investors has been to find where that yield can be obtained with reasonable risk. Moving further out on the risk curve is not what retirement investors generally seek out.
Here are three high-yield ETFs that may work for these investors.
High-Yield ETFs: UBS E-TRACS Wells Fargo Business Development ETN (BDCS)
12-Month Dividend Yield: 9.1%
Expense Ratio: 0.85%, or $85 per $10,000 invested annually.
UBS E-TRACS Wells Fargo Bus Dev Comp ETN (NYSEARCA:BDCS) invests in a basket of Business Development Companies that throw off large distributions. BDCs can be attractive for dividend hunters. BDCs borrow funds at low rates, and raise money by offering equity, and then invest capital in fast-growing companies.
These middle market companies have established a business and cash flow. However, they require additional cash to fund growth. They have probably exhausted bank credit lines. So BDCs take the place of banks. BDCs offer senior or subordinated debt and earn anywhere from 9% to 17%, and often get warrants in the company.
That means the BDC has the potential for making multiples on its investment.
The reason that dividends are so high with BDCs, is because the law requires them to distribute 90% of their net income. Generally, the distributions occur quarterly, and often exceed 8%.
BDCS is a basket of more than 30 components, so there is protection against any one blowing up. BDCS trades at $19.36, near its 52-week low. It has fallen over the past year as interest rates have risen, but interest rates have a long way to go to compete with its 8.71% yield.
High-Yield ETFs: iShares U.S. Preferred Stock (PFF)
12-Month Dividend Yield: 5.7%
Expense Ratio: 0.47%
iShares U.S. Preferred Stock (NYSEARCA:PFF) invests in preferred stocks. Preferreds are terrific as far as I’m concerned, because they trade in tight ranges like bonds, but are traded on exchanges that make them more liquid. Preferred shareholders stand in front of common stock in the event of a liquidation.
Also notable — if a company must suspend dividends, it has to suspend common stock dividends before the preferred dividends.
Companies that are financially in good shape, and are often well-capitalized, offer preferred shares that can have yields from 5% to 9%.
The PFF basket of stocks has a dividend of 5.58%, and holds many of the biggest and most recognizable financial names in the world. With over 300 stocks, it also is well-diversifed.
High-Yield ETFs: SPDR Barclays High Yield Bond (JNK)
12-Month Dividend Yield: 5.6%
Expense Ratio: 0.4%
SPDR Barclays High Yield Bond (NYSEARCA:JNK) has been a bit too volatile for my tastes, but I know some income investors like corporate bonds. Much of the success of JNK depends on the companies inside it, in terms of them meeting debt service I have some worries about the junk bond market as rates rise, however.
Still, if the 5%-plus high-yield ETF interests you, it may be worth considering if you have other high-yield investments and need diversification.
The high-yield ETF holds over 700 securities, and the top 10 positions only account for 4.5% of its assets.
The average bond’s maturity is 6.27 years, and thus the higher yields it fetches. The average yield to worst is 5.94%
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. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected].