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Stock market volatility is sending some investors in search of safer investments. Tech stocks in particular have been falling, with the Nasdaq dropping more than 5% in the last month.
For most investors, “safety” means two things: 1) income, and 2) diversification.
One of the best investments for earning high yields and diversifying your portfolio are ETFs. Like mutual funds, ETFs often invest in more than 100 securities. That means that ETF investors immediately get diversified exposure to all of the investments in the fund. Plus, these funds typically charge lower fees than mutual funds.
My Top Three High Yield ETFs
iShares S&P US Preferred Stock ETF (NYSEARCA: PFF)
The beauty of this preferred ETF is that they pay distributions monthly. So instead of the quarterly income you’re used to from dividend paying stocks, you’ll be getting paid every month.
Preferred stocks is perfect for income investors. These are hybrid securities that have bond- and stock-like qualities. The nice thing about preferred stock is that it is senior to common stock. That means that owners of preferred stock get paid before common stock holders if things go south.
Two of the other major preferred ETFs that pay a 6% plus yield are PowerShares Financial Preferred Portfolio ETF (NYSEARCA: PGF) and PowerShares Preferred ETF (NYSEARCA: PGX). Both have distribution yields right at 6.3%.
All of these ETFs have over 90% of their portfolio invested in financial companies, namely banks. They have very similar holdings, with each ETF having a heavy mix of HSBC, Barclays, Wells Fargo. PNC Financial and BB&T. They all also tend to be heavily concentrated in developed markets, including over 50% exposure to countries other than the U.S.
But what makes iShares S&P US Preferred Stock ETF the best?
It has the highest distribution yield at 6.6%, and the lowest expense ratio at only 0.48%. It’s also the largest preferred stock ETF available to investors. The expense ratio is the annual fee that all mutual funds or ETFs charge their shareholders.
The great attributes of preferred stock doesn’t come without caveats. The one downside for preferred ETFs is that they are interest rate sensitive. Like bonds, preferred stocks become less attractive in a rising interest rate environment, where the price of preferred stock falls as rates rise.
SPDR S&P International Dividend ETF (NYSEARCA: DWX)
Markets outside the U.S. are great places to find high yielding stocks. But most investors don’t have much exposure to these investments. The SPDR S&P International Dividend ETF focuses on high-yielding stocks from developed nations.
With the SPDR S&P International Dividend ETF, investors get a 6.4% distribution yield and pay an expense fee of only 0.45%. This ETF maintains a healthy diversification across industries. Its greatest exposure is to the communications industry, with 18.2% of the ETF invested in the sector.
Its goal is to pick the highest yielding stocks outside of the U.S. But it also avoids more risky stocks by excluding companies that are not profitable and that haven’t grown earnings over the last three years.
Yet, in its search for the highest yielding stocks, the ETF can find itself heavily concentrated in certain countries. Currently, the ETF is 36% invested in Europe’s developed markets, and 24% invested in Australasia (which includes Australia, New Zealand and New Guinea).
iShares FTSE EPRA/NAREIT Global Real Estate ex-U.S. Index Fund (NASDAQ:IFGL)
This ETF is a nice compliment to the S&P International Dividend ETF. But instead of focusing on international stocks, this ETF invests in real estate.
The iShares Global Real Estate ex-U.S. ETF will give investors some of the best exposure to international real estate available. The distribution yield is also one of the highest around, currently yielding an appetizing 11.7%.
This solid real estate play focuses exclusively on real estate investments in the Canadian, European and Asian markets. It also makes sure that each holding derives at least three-quarters of its income from developed nations.
Most of the holdings are companies you’ve never heard of, including Mitsubishi Estate, Mitsui Fudosan Co., Ltd., and Unibail-Rodamco SE. But they are well-known companies outside of the U.S. Mitsubishi Estate is the second largest real estate developer in Japan. And Unibail-Rodamco is the largest commercial real estate company in Europe.
Pacific region real estate makes up nearly three-quarters of the ETF’s holdings, with 25% invested in Japan, 22% in Asia’s developed markets and 13% in Hong Kong. And for its Japan focused holdings, they should get a boost from Bank of Japan’s continued monetary easing.
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For high yield investors, ETFs are a great way to help maintain diversity while getting yield from unique places. Many investors remain under-invested in financials, international markets, and real estate. All three of the ETFs above give investors a bit of each.
ETFs that are steady income plays, offering yields far superior to your typical dividend stock, are great places start for wealth building.
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