It doesn't look like the search for yield is going away anytime soon. Even after the Federal Reserve hiked its overnight rate three times in the past six months, yields on long-term Treasuries and other high-quality bonds have barely budged, remaining at historically depressed levels.
At least for now, investors looking for higher yields can't just plop their money into the iShares Core U.S. Aggregate Bond ETF (AGG) and call it a day; they have to stretch into other areas to find them. Fortunately, there's a host of income ETFs on the market that help investors do just that, including a number of products that launched just this year.
Here we take a look at several of those new launches:
Master limited partnerships (MLPs) are pass-through entities like real estate investment trusts (REITs). Like REITs, MLPs are well-known for their high yields. These companies—which primarily operate energy infrastructure such as pipelines and storage facilities—were battered during the oil crash of the past few years amid fears they'd have to cut their distributions.
While some MLPs have reduced their payouts, the vast majority continue to maintain or even grow their distributions, providing an income opportunity for investors who can stomach the wild swings that MLP share prices often see.
There are plenty of established MLP exchange-traded products on the market, but a pair of newcomers arrived just this year as well. The Cushing 30 MLP Index ETN (PPLN), which launched earlier this month, tracks an equal-weighted basket of 30 MLPs. It's got a yield of 6.71%, according to the index website.
Meanwhile, the Amplify YieldShares Oil Hedged MLP Income ETF (AMLX) puts a new spin on the industry by simultaneously holding a basket of MLPs while shorting crude oil futures. The fund holds a long position on 20 equal-weighted MLPs (chosen based on their distribution yields), and a short position on crude oil futures equal to 40-100% of the value of its long position.
The result is MLP exposure that's hedged against movements in oil prices.
Dividend-Focused Equity ETFs
As a fairly niche area, MLPs might not be right for everyone. For investors looking for a more traditional income strategy in an equity ETF wrapper, a handful of new funds launched this year that fit that bill.
The VictoryShares Dividend Accelerator ETF (VSDA) holds U.S. large-cap stocks that have a history of increasing dividends and that are projected to continue increasing them in the coming years. VSDA's appeal isn't so much its dividend yield―which is a modest but respectable 1.85%―but its ability to grow that yield going forward.
Another fund that aims to maximize not necessarily the amount, but the quality, of yield is the O'Shares FTSE Russell International Quality Dividend ETF (ONTL). This is a fund that weights its constituents based on high dividend yields as well as the high-quality and low-volatility factors. ONTL holds stocks in developed markets outside the U.S., and currently has a 1.94% yield.
Meanwhile, there's also a pair of new actively managed equity ETFs focused on income that look interesting. The Principal Active Global Dividend ETF (GDVD) is a fund that seeks current income and long-term growth of income and capital. It does this by investing in a global basket of dividend-paying stocks.
The ClearBridge Dividend Strategy ESG ETF (YLDE) is another global fund that has similar goals of current income and dividend growth, but it also has the additional aim of investing in companies with positive ESG attributes. The ETF issuer said that it "favors companies that promote best practices when it comes to the environment, social issues and corporate governance."
As actively managed funds, the returns for GDVD and YLDE will largely depend on the skill of the portfolio managers.
On the fixed-income front, there's a trio of ETFs that launched this year with unique income strategies. The FormulaFolios Income ETF (FFTI) is an ETF-of-ETFs that invests in the fixed-income asset classes that display the strongest combination of yield spreads and price momentum.
Currently, the ETF holds a large allocation to U.S. junk bonds and high-yield munis, which together make up almost 50% of the fund. FFTI yields around 4.3%.
Even more focused on high-yield bonds is the IQ S&P High Yield Low Volatility Bond ETF (HYLV). HYLV's portfolio comprises "high yield corporate bonds that have been selected in accordance with a rules-based methodology that seeks to identify securities that, in the aggregate, are expected to have lower volatility relative to the broad U.S.-dollar-denominated high-yield corporate bond market."
That results in an ETF that may have lower credit risk but higher duration risk than the broader junk bond market. The strategy currently yields 4.31%, according to the index website.
The InfraCap REIT Preferred ETF (PFFR) is another fresh fixed-income offering. The fund doesn't invest in bonds, it invests in preferred stocks. But unlike other preferred stock ETFs, PFFR only invests in those issued by REITs, which gives it a targeted industry focus at the expense of diversification.
PFFR has an annualized yield of 4.2%.
Rounding out the list of new income ETF launches are a few multi-asset funds, and one fund that doesn't fit into any of the other buckets.
The actively managed CWA Income ETF (CWAI) invests primarily in investment-grade corporate bonds, but it may also invest in lower-quality bonds and high dividend-yielding equities.
Taking a different approach to multi-asset income is the QuantX Risk Managed Multi-Asset Income ETF (QXMI). This ETF-of-ETFs uses a proprietary selection and weighting methodology to generate income using high-yielding fixed-income and equity securities.
Top holdings right now include the iShares JP Morgan USD Emerging Markets Bond ETF (EMB), the iShares Mortgage Real Estate Capped ETF (REM) and the SPDR Bloomberg Barclays Convertible Securities ETF (CWB).
Finally, there's the Saba Closed-End Funds ETF (CEFS). This fund brings active management to the closed-end funds space. It invests in closed-end funds trading at a discount to net asset value, while hedging the portfolio's exposure to rising interest rates. CEFS' annualized 7.8% yield offsets its hefty 2.42% expense ratio.
Contact Sumit Roy at firstname.lastname@example.org.