Since the financial crisis, it has been a long, slow process of finding reliable yield. Investors have had a difficult time in the face of central banks cutting interest rates and introducing vast amounts of monetary stimulus. However, these trends have reversed in some parts of the world of late; the Fed in the U.S. is consistently hiking interest rates, and other central banks around the world are considering similar plans of action.
While the benchmark federal funds rate was close to zero just three years ago, the target range is now 3%-3.25%. The U.S. 10-year Treasury yield climbed from a low of 1.32% back in 2016 to 3.96% in September 2022. Given these developments, it's worth asking: should investors still consider piling on risk in alternative investments in search of higher yields? Or should they settle with Treasuries and investment-grade bonds now that they are capable of generating yield once again?
In the search for yield, exchange-traded funds (ETFs) have become a somewhat unlikely candidate. Those investors looking for yields that are higher than 2% to 3% consistently may need to search for investments with large distributions. In some cases, these investments can be undertaken with ETF vehicles, producing yields higher than 6%, as outlined in a recent report from ETF.com.
- With falling stock prices, rising inflation, and rising interest rates, investors are looking for relatively safe-investments that produce a good yield.
- The 10-year treasury note yield is at a multi-year high and the federal funds rate has jumped from nearly zero to a range of 3%-3.25% in just three years.
- This broad, macro environment has made exchange-traded funds (ETFs) a somewhat surprising option for those seeking high yield.
- The ETFs that tend to provide the highest yield tend to be found in the following categories: Mortgage REITs, Master Limited Partnerships (MLPs), and Superdividend.
Mortgage REIT ETFs
According to the ETF.com report, there is a single ETF that produces a double-digit yield, based on the average dividend yield of its holdings and the latest 30-day SEC yields. This is the VanEck Vectors Mortgage REIT Income ETF (MORT), which yields 10%. Mortgage REITs own mortgage-backed securities, unlike equity REITs, which hold physical real estate. Mortgage products, in this case, typically employ leverage. That's a big part of the reason why MORT can generate sizable yields.
The spread between short- and long-term interest rates also contributes to exceptional yields for the iShares Mortgage Real Estate ETF (REM), with 7.32% yield, and the Invesco KBW High Dividend Yield Financial ETF (KBWD), with 9.32% yield. KBWD holds a diverse basket of financial companies characterized by high yields, including insurance companies, private equity, and mortgage REITs, among others.
Master limited partnerships (MLPs) are another category of companies that traditionally provide high yields. MLPs tend to focus on energy infrastructure businesses like storage facilities or pipelines. Three MLP-based ETFs that enjoy above-average yields are the VanEck Vectors High Income MLP ETF (YMLP) with 9.51% yield, the Direxion Zacks MLP High Income Index Shares (ZMLP) with 8.97% yield and the Global X MLP ETF (MLPA) with 6.91% yield.
So-called "superdividend" ETFs look for stocks in any country and any sector. Their focus is solely on high yields. The Global X Superdividend ETF (SDIV) is a leader among this group of ETFs, weighing 100 of the best dividend-yielding stocks in the world to produce 13.14% yield. Global X has other superdividend ETFs available as well, each focusing on a slightly different goal. For example, the Global X MSCI SuperDividend EAFE ETF (EFAS) generates a 6.91% yield, while the Global X MSCI SuperDividend Emerging Markets ETF (SDEM) generates 11.41%.
A Word of Caution
Investors tend to think of ETFs as stable, less-risky alternatives to many other popular investment vehicles. While this may be true some of the time, the products listed above are focused on baskets that may be inherently more risky than other ETF baskets. While these ETFs enjoy high average dividend yields for their holdings as well as strong 30-day SEC yields, suggesting that they are somewhat sustainable, there is never a guarantee that any particular non-Treasury investment will remain stable over the long term. Investors interested in these ETFs must be aware of the risks they take on.