Ever since the Fed cut rates to zero in 2008, the search for yield has been a big theme in financial markets. Short-term debt yields nothing, and even longer-term Treasurys barely yield above 2 or 3 percent.
While the Fed is expected to lift rates from rock-bottom levels in the coming months, the low interest rate environment isn't going away anytime soon. The Federal Reserve "dot plot," which maps where central bank officials see rates headed in the future, indicates that the benchmark overnight rate could remain below 3 percent through 2017.
That means investors will have to continue reaching out in the risk spectrum if they want to capture higher yields. Whether taking on that risk is a good idea or not is an open question, but for the investors who want them, the ETF universe is offering up plenty of juicy yields.
Of the 11 highest-yielding exchange-traded funds, each pays out an annualized 8 percent or more. That's well above even U.S. junk bond ETFs like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-68) and the SPDR Barclays High Yield Bond ETF (JNK | B-68), which have yields in the 6 to 7 percent range.
MLPs With Double-Digit Yields
Making multiple appearances on the highest-yields list are master limited partnership (MLP) funds such as the Yorkville High Income MLP ETF (YMLP), the Global X Junior MLP ETF (MLPJ) and the Direxion Zacks MLP High Income ETF (ZMLP)―all with double-digit yields.
MLPs are typically involved in the energy infrastructure business and are notorious for having high payouts.
However, the already-lofty yields of MLPs got even higher this year after the sector was hammered on the back of the oil industry bust. Operating energy pipeline and storage facilities, many MLPs will see a reduction in cash flows as oil production in the U.S. plunges.
At worst, some of the riskier, smaller MLPs―the ones that the three ETFs mentioned above tend to hold―could go bankrupt. At the very least, many MLPs will see reductions in their distributions to shareholders.
That said, if oil prices and output eventually recover, as many analysts expect, MLP ETFs could be a bargain at these levels.