The Search for Higher Yields Isn’t Over

August 25, 2022

For much of the past decade, investors struggled to generate income as central banks around the world cut interest rates to nothing and unleashed unprecedented amounts of monetary stimulus. 

This year, that paradigm has reversed in a major way. In the U.S., the Fed has unleashed aggressive interest rate hikes in an attempt to bring down inflation.  

The benchmark federal funds rate is projected to reach more than 3% this year after hovering near zero in the aftermath of the pandemic. Meanwhile, the U.S. 10-year Treasury yield doubled from 1.51% at the start of the year to last trade at 3.1%. 

Ask almost any investment strategist out there, and they’ll probably say the same thing: These higher yields are with us to stay. 

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 whom you ask. For some investors, a 3%, 4% or even 5% yield may not be enough. They might be willing to take on a greater allocation to equities to generate higher returns.  

Of course, the returns you get with a broad stock market portfolio can be volatile, which turns some investors off. In that case, they may be interested in investments with large, consistent 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 compiled a list of the 15 ETFs with the highest yields, excluding funds that made large, one-time distributions from this selection. 

The funds are selected based on annualizing the most recently announced net dividend and then dividing by the share price. The data is provided by Bloomberg.  

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

Covered-Call ETFs 

A handful of covered-call ETFs are among the highest-yielding ETFs today, including the Global X Nasdaq 100 Covered Call ETF (QYLD)

QYLD holds stocks in the Nasdaq and sells call options on them. It collects fees from options buyers and passes that along to holders of the ETF. The idea behind covered-call options is that an investor gives away upside in exchange for guaranteed yield. If the stock an investor writes calls on increases in price beyond the option’s strike price, the buyer will take the shares away. 

QYLD writes more expensive, at-the-money calls. In turn, it generates a lot of premium income from doing that, but it doesn’t participate at all in the upside of Nasdaq stocks. With a 12.2% yield, many investors don’t mind.  

The Global X S&P 500 Covered Call ETF (XYLD) and the First Trust Nasdaq BuyWrite Income ETF (FTQI) also employ options-writing strategies to generate yield. 

International Income 

International stocks are another place investors can find high yields. The Xtrackers MSCI All World ex US High Dividend Yield Equity ETF (HDAW) holds a broad basket of high-yielding international stocks, such as Novartis AG, BHP Billiton Group and Unilever. 

These are stable, strong cash-flowing businesses that pass on a lot of their profits to investors. By holding them, HDAW yields a whopping 14.1%, according to data from Bloomberg.  

The iShares Asia/Pacific Dividend ETF (DVYA) and the WisdomTree International High Dividend Fund (DTH) also get their highs yields from international stocks. 

 
Highest-Yielding ETFs 

Ticker Fund Yield (%)
HDAW  Xtrackers MSCI All World ex US High Dividend Yield Equity ETF 14.1
QYLD  Global X Nasdaq 100 Covered Call ETF 12.2
DVYA  iShares Asia/Pacific Dividend ETF 12.1
QRMI  Global X Nasdaq 100 Risk Managed Income ETF 12.1
XYLD  Global X S&P 500 Covered Call ETF 12.1
TUGN  STF Tactical Growth & Income ETF 12.0
RYLD  Global X Russell 2000 Covered Call ETF 12.0
HDEF  Xtrackers MSCI EAFE High Dividend Yield Equity ETF 11.7
VWID  Virtus WMC International Dividend ETF 11.5
DTH  WisdomTree Trust - WisdomTree International High Dividend Fund 11.4
FTQI  First Trust Exchange-Traded Fund VI First Trust Nasdaq BuyWrite Income ETF 11.4
IQDY  FlexShares International Quality Dividend Dynamic Index Fund 10.9
YYY  Amplify High Income ETF 10.8
HYIN  WisdomTree Alternative Income Fund 10.6
DLS  WisdomTree International SmallCap Dividend Fund 10.5

 

Follow Sumit Roy on Twitter @sumitroy2 

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