Highest Yielding ETFs

August 30, 2018

Is the search for yield over? For years after the financial crisis, investors struggled to generate income as central banks around the world cut interest rates to nothing and unleashed unprecedented amounts of monetary stimulus.

More recently, that paradigm has begun to reverse. In the U.S., the Fed is consistently hiking rates, while its counterparts in Europe and Asia are itching to join it.

The benchmark federal funds rate is nearly 2% after hovering near zero three years ago. Meanwhile, the U.S. 10-year Treasury yield more than doubled from 1.32% at its low point in 2016 to last trade at 2.85%.

Ask almost any investment strategist out there, and they’ll probably say the same thing: Yields are headed higher.

The Search Continues

If that’s the case, does it still make sense for investors to take on additional risk and wade into alternative investments to stretch for yield—or should they be content with Treasuries and other investment-grade bonds?

The answer, of course, depends on who you ask. But the fact remains that even though interest rates have risen from their rock-bottom levels, they are still extremely low on a historical basis. Outside the post-crisis period, current rates are lower than they’ve been at any other point in the past 55 years.

For some investors, a 2-3% yield may not be enough. They might be willing to take on a greater allocation to equities to make up for the lack of return in the investment-grade bond market.

Other investors may want higher consistent yields, which most bonds and even stocks can’t provide. In that case, they may be interested in investments with especially large distributions, equal to double or even triple what you could get elsewhere.

Some of these investments are available in an ETF wrapper—funds with yields in excess of 6%.

It goes without saying that these funds are much riskier than the average investment-grade bond fund. Stretching for yield is just that—going further out on the risk spectrum to achieve higher distributions.

Exercise Caution

We’ve put together a list of the 20 ETFs with the highest yields. Funds that have made large one-time distributions (in the event of a capital gains distribution, for example) are excluded from the list.

The ETFs are selected based on the average dividend yield of their holdings and the funds' latest 30-day SEC yields (a standardized yield calculation specified by the Securities and Exchange Commission), metrics that suggest some degree of sustainability for the yields.

Of course, no yield—other than that of Treasuries—is guaranteed, so exercise caution when buying any of these funds.

Mortgage REITs

The only ETF to clock in with a double-digit yield is the VanEck Vectors Mortgage REIT Income ETF (MORT), at 10%.

Unlike equity REITs, which own physical real estate, mortgage REITs own mortgage-backed securities. These REITs often employ leverage, attempting to capture the spread between short-term and long-term interest rates, generating juicy yields in the process.

Along with MORT, the iShares Mortgage Real Estate ETF (REM) is another fund in the category, with a yield of 9.8%.

While MORT and REM focus exclusively on mortgage REITs, No.3 on the highest-yielding list takes a more diversified approach. The Invesco KBW High Dividend Yield Financial ETF (KBWD) holds a basket of financial companies with high yields, including mortgage REITs, insurance companies, private equity companies and others.

The added diversification doesn’t hurt the yield at all though, as KBWD offers a chunky 9.8% yield.

 

Ticker Fund Fund Average Dividend Yield 30-Day SEC Yield
MORT VanEck Vectors Mortgage REIT Income ETF 10.01 9.45
REM  iShares Mortgage Real Estate ETF 9.84 9.56
KBWD  Invesco KBW High Dividend Yield Financial ETF 9.77 8.61

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