The latest Fed minutes from Mar 3 & 15 meeting reaffirmed concerns related to the economic damage inflicted by the deadly coronavirus. In light of this, the central bank will keep interest rates near zero until the economy has ‘weathered’ coronavirus impact and is on track to achieve the maximum employment and price stability goals.
The Fed officials predict two plausible scenarios for the U.S. economy, which is grappling with the coronavirus outbreak. The U.S. economy will start to recover in the second half of the year in one scenario while in the worst-case scenario there will be a recession with no significant rebound until next year (read: Coronavirus Panic to Send Economy Into Recession: ETF Picks).
The current situation has forced investors to look elsewhere in the ETF space for their current income. As such, they are showing great interest in products that pay outsized yields irrespective of the segments.
Why High Yield?
High yield ETFs play a defensive role in a portfolio and can reduce volatility in turbulent times. These products provide greater stability and safety, thanks to their strong cash flow streams. While U.S. dividend ETFs have been always popular in this space, yield-hungry investors often overlook the products that do not include the top dividend-paying companies but still offer robust yields. Some of these funds could be illiquid and might not participate in the global stock rally but offer outsized payouts or sizable yields on a regular basis.
Below, we have highlighted some ETFs with double-digit yields that could be the perfect choice for investors seeking higher income in the low rate environment while protecting the downside risk from market uncertainty. Yield on these products are clearly crushing the broad dividend space and the high yield bond world by wide margins.
iShares Mortgage Real Estate ETF REM – Yield: 23.3%
This is the most popular mortgage REIT ETF with AUM of $644.7 billion and average daily volume of 651,000 shares. It offers exposure to the U.S. residential and commercial mortgage real estate sectors by tracking the FTSE Nareit All Mortgage Capped Index. It holds 36 stocks in its basket and charges investors 48 bps a year in fees and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook (read: Fed Cuts Rates to Near Zero: ETFs & Stocks to Explode Higher).
ETRACS Alerian Natural Gas MLP Index ETN MLPG – Yield 23%
MLPG is designed to track an investment in the Alerian Natural Gas MLP Index, and pay a variable quarterly coupon linked to cash distributions associated with the underlying MLP constituents, less investor fees. It charges 85 bps in annual fees and has managed $1.9 million in its asset base. The note trades in average daily volume of 2,000 shares.
Virtus InfraCap U.S. Preferred Stock ETF PFFA – Yield 22.3%
This fund seeks current income and, secondarily, capital appreciation through a portfolio of preferred securities issued by U.S. companies with market capitalizations of over $100 million. It charges higher annual fees of 2.01% and has been able to manage an asset base of $60.2 million, The ETF trades in moderate volume of 78,000 shares (read: 5 Preferred Stock ETFs Yielding 5% or More & Losing Little).
Invesco KBW High Dividend Yield Financial ETF KBWD – Yield 19.3%
This ETF offers exposure to 40 financial companies with competitive dividend yields by tracking the KBW Nasdaq Financial Sector Dividend Yield Index. It has amassed $166.5 million in its asset base while trading in average daily volume of 89,000 shares. The fund charges 1.58% in annual fees from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
VanEck Vectors BDC Income ETF BIZD – Yield 18%
This is the only ETF offering pure play exposure to business development companies (BDCs) by tracking the MVIS US Business Development Companies Index. It holds 26 stocks in its basket with AUM of $154.2 million and average daily volume of 151,000 shares. The product has expense ratio of 9.62% has a Zacks ETF Rank #3 with a Medium risk outlook.
Virtus Private Credit Strategy ETF VPC – Yield 17%
With AUM of $99.3 million, this ETF delivers an alternative source of yield to traditional fixed income by focusing on the private credit market. It tracks the Indxx Private Credit Index, which provides passive exposure to listed instruments that emphasize private credit, including BDCs and closed-end funds (CEFs). It also charges high annual fees of 8.32% and trades in average daily volume of 55,000 shares (read: 9 Successful New ETFs of 2019).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>