11 Highest Yielding ETFs

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.

Mortgage REITs

Another trio of ETFs with exceptionally high payouts are the Market Vectors Mortgage REIT Income ETF (MORT | B-96), the iShares Mortgage Real Estate Capped (REM | B-98) and the Global X SuperDividend REIT ETF (SRET | F-40).

MORT and REM hold exclusively mortgage REITs. Unlike equity REITs which hold physical properties, mortgage REITs hold mortgage-backed securities.

These REITs, which often use leverage, borrow at short-term rates and lend at higher, long-term rates. This effectively makes them a kind of carry trade rather than a play on the real estate market per se.

Anticipation that the Fed will increase short-term interest rates soon has put tremendous downside pressure on this sector recently, lifting their yields into the double-digit range (yields rise as prices decline).

A bearish scenario for mortgage REIT ETFs would be if short-term rates rise while long-term rates stay depressed, eating into the mortgage REITs' income. On the other hand, if the increase in the long end of the curve outpaces gains on the short end, the sector should benefit and payouts may stay high.

Taking a slightly different tack than MORT or REM is SRET, which holds a combination of equity and mortgage REITs from around the world. The ETF has a slightly lower payout than the other two, but it's performed a little bit better on a total return basis since its inception earlier this year.

Diversified High-Yield ETFs

While most of the ETFs on this list are focused on a specific area of the market, the Arrow Dow Jones Global Yield ETF (GYLD) and the Global X SuperDividend ETF (SDIV) take a different tack by reaching out globally to many different sectors and asset classes in their search for high yield.

The result is a hodgepodge of securities with little in common other than their high yields. On a total return basis, these ETFs haven't performed particularly well during the past few years, but for yield-at-any-cost investors, they could be of interest.

Silver Covered-Call Strategy

One ETF on this list that is rather distinct is the Credit Suisse X-Links Silver Shares Covered Call ETN (SLVO | F-41). This ETN holds physical silver through its ownership in the iShares Silver Trust (SLV | A-99) and then sells out-of-the-money covered calls on its position.

By selling calls on its SLV holding, SLVO attempts to generate a steady stream of income for investors, but at the expense of capping the potential upside from any silver price rally. In a flat-to-declining silver-price environment such as we have now, the strategy has outperformed an outright position in SLV, but returns have still been volatile.

The yield looks nice based on the last distribution, but that says little about future returns, which are based on unpredictable option premiums and silver price movements.

Note: Table edited to include YYY and HVPW

Contact Sumit Roy at [email protected].