Top Fixed Income ETFs For Returns & Yields

June 08, 2016

3-Year Returns For HYMB, HYD


Currently, HYMB has a 30-day SEC yield of 3.73%, while HYD has a 30-day SEC yield of 3.96%.

Income from muni-bond ETFs is exempt from federal income tax, which boosts the taxable equivalent yield of these funds significantly depending on an investor's income tax rate.

Dollar-Denominated EM Bonds

Emerging markets have a reputation for being a risky area to invest in―and for good reason. From volatile stock swings to debt defaults, emerging market assets have faced enormous challenges throughout their history.

However, one area of emerging markets that's been relatively well-behaved is dollar-denominated debt. When times get tough, struggling emerging market governments may be inclined to default on their local-currency debt or print money to pay it back. But they don't have that same luxury when it comes to dollar-denominated debt.

Defaulting on this type of debt would lock those governments out of the global financial markets and be a worst-case scenario, which they would like to avoid at all costs. Currently, even the lowest-rated governments continue to pay interest on their dollar-denominated debt.

Thus, dollar-denominated emerging market ETFs are a great way to capture higher yields, while taking on a manageable amount of risk. The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY | B-60) currently has a 30-day SEC yield of 5.36%, while the rival iShares JP Morgan USD Emerging Markets Bond ETF (EMB | B-58) has a yield of 5.09%.

Because they are dollar-denominated, investors in these ETFs don't have direct currency risk. However, declining emerging market currencies make it harder for the governments to pay interest on the bonds―effectively increasing credit risk (rising emerging market currencies have the opposite effect).

PCY is up 16.4% in the last three years, while EMB is up 13.1% in that period.


3-Year Returns For PCY, EMB


Preferred Stocks

Preferred stock exchange-traded funds are among the best-performing fixed-income ETFs in recent years. The PowerShares Financial Preferred Portfolio (PGF | C) and the PowerShares Preferred Portfolio (PGX | B) each gained nearly 26% in the last three years.


3-Year Returns For PGF, PGX


Preferred stocks have characteristics of both equity and debt. They typically offer a sizable dividend that's safer than the dividends on a company's common stock, but not as safe as the interest payments on a company's bonds. Additionally, preferred stock can sometimes be converted into common stock.

Preferreds are essentially a way to capture higher yields than corporate bonds, but with higher risk if the company faces hard times.

Pricewise, PGF and PGX have been remarkably stable over the past seven years, and both have 30-day SEC yields in the 5.5% range. However, they fell off a cliff during the financial crisis in 2008/2009, illustrating that they are susceptible to significant sell-offs if the economy takes a big enough hit.


Contact Sumit Roy at [email protected].


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