Top 10 Highest Yielding ETFs

With interest rates up from their record lows of 2016, the search for yield among investors isn't as intense as it was last year. Still, with rates at historically low levels even now, there's plenty of demand for high-yielding products.

In the ETF world, issuers have been more than happy to meet that investor demand by launching numerous products designed to generate high yields. Some of these offerings are sound and are worthy of consideration by income-hungry investors.

Others are questionable offerings that are best left untouched by most investors. The highest-yielding ETFs in particular often provide poor total returns, with declines in shares prices offsetting the sizable distributions―but not always.

In this article, we'll discuss the good and the bad as we lay out the current 10 highest-yielding ETFs on the market. We've excluded products that made large one-time distributions recently and instead include only those that have paid large distributions more consistently.

MLPs

The InfraCap MLP ETF (AMZA) is one of several products focused on master limited partnerships (MLPs) on this list. AMZA is an actively managed fund that primarily holds energy infrastructure companies that use the tax-advantaged MLP structure.

Energy MLPs are known for their strong cash flows and high yields. There are three main types of MLP ETFs, which you can read about here. AMZA is considered a C-corporation, which means taxes on most of the fund's distributions are deferred until an investor sells.

Those distributions are hefty. The 12-month yield for the ETF is 18.5%. That's well above the 7.3% yield for the competing Alerian MLP ETF (AMLP), the largest ETF in the segment, with nearly $11 billion in assets.

Despite the higher yield, the actively managed AMZA has underperformed its competitor on a total return basis since its inception. In the period from October 2014 through today, the fund had a loss of 36% compared with a loss of 16.4% for AMLP.

Total Return For AMZA & AMLP Since October 2014

 

Along with AMZA, three leveraged MLP-focused products are on the highest-yielding list: the Credit Suisse X-Links Monthly Pay 2x Leveraged Alerian MLP Index ETN (AMJL), the ETRACS 2x Monthly Leveraged Alerian MLP Infrastructure Index ETN (MLPQ) and the ETRACS 2x Monthly Leveraged S&P MLP Index ETN (MLPZ).

All three of these exchange-traded notes track broad MLP indexes and reset their leverage monthly. Annualized yields for these products range from 11.2% to 14.3%, juiced up by their leverage. Investors should be mindful of the impact of monthly leverage resets on returns, and know that distributions from MLP ETNs are taxed as ordinary income.

BDCs

Another ETRACS product on the highest-yielding list is the ETRACS 2x Leveraged Long Wells Fargo Business Development Company Index ETN (BDCL), with a yield of 14.5%. Business development companies (BDCs) invest in small U.S. firms that are in need of capital. These small companies are often private, giving investors in publicly traded BDCs a way to get exposure to that segment of the economy.

BDCs distribute the vast majority of their income to investors, resulting in high yields. BDCL further juices those yields with its leverage. Since its inception in May 2011, BDCL has a total return of 102.4%.

Total Return For BDCL Since May 2011

 

CEFs

The YieldShares High Income ETF (YYY) is a fund that buys up closed-end funds (CEFs) to generate big distributions. CEFs are investment funds that trade on exchanges just like exchange-traded funds. But unlike ETFs, there is no creation/redemption mechanism, so they often trade at large discounts and premiums to their net assets values.

YYY takes advantage of that by holding 30 CEFs based on discount to net asset value, funds yield and liquidity. YYY is essentially a fund of closed-end funds and currently has a distribution yield of 10.1%. Since its inception in mid-2013, the fund had a total return of 20.3%.

Meanwhile, the ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (CEFL) tracks the same index but is leveraged 2x. Its 12-month yield is almost double—18.3%—thanks to the leverage.

Total Return For YYY And CEFL Since 2013

 

Options Strategies

Rounding out the list of highest-yielding ETFs are three products that generate income through the options market. The U.S. Equity High Volatility Put Write Index Fund (HVPW) writes put options on 40 of the most volatile companies in the stock market with market capitalizations above $5 billion.

This strategy generates steady income, but is susceptible to large losses should the underlying stocks fall significantly. HVPW uses 60-day puts options with strike prices close to 85% of the closing price of the underlying stock.

The fund has consistently delivered strong yields―the fund was last yielding 9.2%―but has experienced big share price declines during market sell-offs. In turn, the total return of HVPW is a relatively modest 11.3% since its inception in February 2013.

Using a similar strategy to HVPW are the Credit Suisse X-Link Gold Shares Covered Call ETN (GLDI) and the Credit Suisse X-Links Silver Shares Covered Call ETN (SLVO).

GLDI holds a position in the physically backed gold fund, the SPDR Gold Trust (GLD), while selling 3% out-of-the-money calls on the position each month. Using such a strategy generates income but limits the upside of the fund should gold prices rise by more than 3%. The fund is also fully exposed to any downside in gold prices.

Total Return For HVPW, GLDI And SLVO Since 2013

 

SLVO has almost the exact same methodology but applies it to the iShares Silver Trust (SLV) and sells 6% out-of-the-money calls.

GLDI and SLVO currently have yields north of 9.1%; however, they have performed poorly on a total return basis since their inception in 2013, losing about 25% each.

For a full list of the 10 highest-yielding ETFs, see the table below:

At the time of writing, the author did not own any of the securities mentioned. Contact Sumit Roy at [email protected].