After raising interest rates four times in 2018, it is likely the Federal Reserve will, at the very least, slow its pace of rate hikes in 2019. Some bond market observers are speculating that it is possible the Fed does not boost borrowing costs at all, while a smaller amount thinks a rate cut is possible later in the year.
The more sanguine interest rate outlook is having a profound impact on high-yielding sectors and the related exchange-traded funds (ETFs). In fact, some this year’s best sector funds are high-yield ETFs offering exposure to the real estate and utility sectors, among others.
Of course, there are some risks to consider with high-yield ETFs. A high dividend yield can mean a stock or fund’s price has recently experienced significant retrenchment. In the case of individual companies, a high dividend yield can also be a sign of financial stress and could portend imminent negative dividend action, such as a cut or suspension.
Still, many income investors embrace high-yield ETFs. Looking for high-yield ETFs with yields of 10% or more, as we do, turns up an array of complex and leveraged funds, so we parsed those out to focus on more practical high-yield ETFs.
Global X Nasdaq 100 Covered Call ETF (QYLD)
Expense Ratio: 0.68% per year, or $68 annually per $10,000 invested
Among the high-yield ETFs with dividend yields in excess of 10%, the Global X Nasdaq 100 Covered Call ETF (NASDAQ:QYLD) is one of the more basic strategies to understand. The $470.47 million QYLD tracks the CBOE Nasdaq-100 BuyWrite V2 Index.
Essentially what QYLD does is write covered calls on the Nasdaq-100 Index, a popular, but low-yielding tech-heavy benchmark. In terms of generating yield, this high-yield ETF’s strategy works out to a trailing 12-month yield of almost 11%. Compare to that a yield of just 0.79% on the Nasdaq-100 Index.
“QYLD’s covered call position is created by buying (or owning) the stocks in the Nasdaq 100 Index (NDX) and selling a monthly at-the-money index call option,” according to Global X research. “An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price (strike price) within a certain period or on a specific date. In return for the sale of the call option, the fund receives a premium, which can potentially provide income in sideways markets and limited protection in declining markets.”
VanEck Vectors Mortgage REIT Income ETF (MORT)
Expense Ratio: 0.41%
Mortgage real estate investment trusts, also known as mREITs, are a high-yield asset class that is also sensitive to changes in interest rates. The more sanguine outlook for U.S. interest rates is one of the primary reasons the VanEck Vectors Mortgage REIT Income ETF (NYSEARCA:MORT) is up 9.67% year-to-date.
“Mortgage REITs may potentially stand to benefit from the evolving mortgage finance market but are sensitive to interest rate and regulatory changes,” according to VanEck.
The $169.30 million MORT, which is almost eight years old, holds 25 mREITs and has a 30-day SEC yield of 10.12%.
Global X SuperDividend ETF (SDIV)
Expense Ratio: 0.58%
The $929.59 million Global X SuperDividend ETF (NYSEARCA:SDIV) is a global high-yield ETF and can be used as a complement to basic U.S. and developed market equity funds. Home to just over 100 stocks, this high-yield ETF allocates almost 54% of its weight to domestic equities. Australia and the U.K. combine for over 17% of SDIV’s geographic exposure.
This high-yield ETF has a distribution yield of 17.50%, which is primarily derived from significant real estate exposure. SDIV features exposure to about 10 industries and sectors, but REITs and mREITs combine for about 55.60% of the fund’s roster.
With that level of real estate exposure, SDIV can be sensitive to changes in interest rates in the U.S. and some other developed markets. This high-yield ETF pays its dividend monthly, a trait to consider for investors looking for consistent income.
InfraCap MLP ETF (AMZA)
Expense Ratio: 0.95%
Any list of high-yield ETFs is bound to include a fund or two dedicated to master limited partnerships (MLPs). The InfraCap MLP ETF (NYSEARCA:AMZA) makes the cut here as its yield is a whopping 14%.
That is high, even among MLP funds, but AMZA uses some methodologies beyond equity ownership to boost its yield. This high-yield ETF can use options strategies as hedges and to boost income.
“Modest leverage (typically 20-30%) is utilized to enhance MLP beta, and options strategies are used in an effort to enhanced current income,” according to the issuer.
AMZA’s managers can also selectively short MLPs, potentially adding another avenue of returns for this high-yield ETF’s investors.
Saba Closed-End Funds ETF (CEFS)
Expense Ratio: 2.55%
The Saba Closed-End Funds ETF (CBOE:CEFS) does not have a dividend yield of 10%, but it still qualifies as a high-yield ETF with a yield of 8.51%.
“Closed-end funds or CEFs are a publicly traded investment company that raised a certain amount of capital once through an initial public offering,” according to ETF Trends. “The price of the CEF can fluctuate like any other stock listed on an exchange. However, unlike ETFs, a CEF issues a set number of shares, so the CEF can trade at a high premium or discount to its underlying net asset value.”
Actively managed, CEFS offers investors capital appreciation potential and robust levels of income by investing in closed-end funds residing at discounts to their net asset values (NAVs). This high-yield ETF’s managers also look to hedge interest rate risk.
As of this writing, Todd Shriber did not own any of the aforementioned securities.