Introduction
Investors looking for yield seek income from their investments. This income can come in the form of dividends from stocks or interest payments from bonds.
The term “high-yield funds” generally refers to mutual funds or exchange-traded funds (ETFs) that hold stocks paying above-average dividends, bonds paying above-average interest, or both.
While long-term investors typically seek growth in their portfolios over time, many who are seeking high-yield funds may be retirees looking for extra income.
Whether you are investing in high-yield mutual funds or high-yield ETFs, it’s important to have a clear goal in mind when purchasing these income-focused investments.
High-Yield ETFs vs. High-Yield Mutual Funds
The biggest advantages of high-yield ETFs over high-yield mutual funds are lower fees, diversification, and internal liquidity.
There are many high-yield ETFs on the market compared to high-yield mutual funds. As an investor, you can find yield in various ways, but there is one major downside to high-yield ETFs: they are passively managed, so they must match the performance of a benchmark index. This means that the manager of a high-yield ETF is forced to trade in a down market, even at unfavorable prices.
This issue also exists in index mutual funds. Managers cannot navigate poor market conditions by trading or holding as they wish. However, this diverse array of funds should suit a wide range of investment needs. We have included ETFs that pay high yields, but we have also chosen to include those that balance diversification with an income objective.
If you choose to invest in high-yield ETFs, such as those we’ve listed, be sure to compare what we like about them with what we don’t.
1. iShares iBoxx $ High-Yield Corporate Bond (HYG)
HYG should be on your radar if you are looking for one of the most widely traded high-yield bond funds in the market. The portfolio is primarily composed of corporate bonds, with maturities ranging from three years to ten years. The bonds also carry a lower credit quality than investment grade, meaning they are rated below BBB by Standard & Poor’s or below Baa by Moody’s. AAA is the highest rating.
The fund’s effective yield is 3.40% as of May 2021, and the expense ratio is 0.49%, or $49 for every $10,000 invested.
2. SPDR Bloomberg Barclays High-Yield Bond (JNK)
Another heavily traded fund that invests in high-yield bonds is JNK, which had an effective yield of 3.79% as of May 2021 and an expense ratio of 0.40%. As the ticker symbol suggests, JNK invests in bonds with a credit quality lower than investment grade. Maturities typically range in the intermediate term, which is between three years and ten years.
3. Vanguard High Dividend Yield (VYM)
If you want to generate income through a low-cost ETF that holds dividend-paying stocks, you’ll love VYM. This fund tracks the FTSE High Dividend Yield Index, which consists of about 400 large-cap stocks that pay above-average dividends to investors. As of May 2021, the effective yield for VYM is 2.76%, and expenses are low at 0.06%.
4.VanEck Vectors High-Yield Municipal Index (HYD)
Take a look at HYD if you have a taxable account and are looking for a high-yield ETF. This fund tracks the performance of the Bloomberg Municipal Custom High Yield Composite Index, which consists of high-yield, long-term municipal bonds in the United States that provide tax-free income.
This tax preference can be very attractive if you are in a high tax bracket, meaning it will translate into a high effective tax return. As of May 2020, the actual yield of HYD is 2.67%, and the expense ratio is 0.35%.
5. Alerian MLP (AMLP)
MLP funds invest in master limited partnerships, which often focus on energy-related industries. The performance of MLP funds can be volatile, and they have a more complex structure than equity corporations. If you’re considering buying these funds, you should do more research than usual.
The expense ratios for MLP funds can be high and sometimes difficult to understand. These funds are best if you are looking for high yields, often reaching 7% or more. The expense ratio is 0.85%, which is low for an MLP fund.
6. WisdomTree Emerging Markets High Dividend Fund (DEM)
If you are looking to diversify your high-yield investments with foreign stocks, specifically emerging markets, you may want to check out DEM. The fund management team seeks to find and hold the highest dividend-paying stocks available in emerging markets. The expense ratio is 0.63%.
7. SPDR Dow Jones International Real Estate (RWX)
Investing in real estate with sector-specific funds can be a good way to achieve high returns for income purposes. REITs must typically have at least 100 shareholders, and by law, they are required to pay out at least 90% of their income to shareholders.
RWX tracks the Dow Jones Global ex-U.S. Select Real Estate Securities Index, which consists of REITs
Source: https://www.thebalancemoney.com/best-high-yield-etfs-4154042
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