For the past several years, interest rates in the U.S. and in many developed countries around the world have been hovering at record lows as central banks have attempted to spur economic growth by reducing borrowing costs. And all indications are that the low interest rate environment is here to stay–at least for another few years. Analysts generally agree that most interest rates won’t begin to climb until 2014 at the earliest, and it’s entirely possible that investors are looking at another several years of record low rates.
While this environment may be good for those looking to borrow, it poses a significant challenge to those looking to generate meaningful current returns on their portfolio. Against this backdrop, many traditional sources of current returns have dried up. Treasuries yield next-to-nothing; 10-year notes are sporting a yield in the neighborhood of 1.7%, while 5-year notes offer up a paltry 0.70%. Even long-dated 30-year government bonds, which come with significant interest rate risk, are yielding well less than 3%. Some TIPS issues have even gone off with negative yields, highlighting the struggles investors can face [see 101 ETF Lessons Every Advisor Should Learn].
While meaningful yields are hard to come by, they do exist. Not surprisingly, capturing these meaty yields now involves significant risk; any asset class providing a yield of 5% is generally quite volatile. Below, we profile seven exchange-traded products that have yields in the neighborhood of 7% [see the High Yield ETFdb Portfolio with a free 7-day trial to ETFdb Pro]:
Global X SuperDividend ETF (SDIV)
SDIV is one of more than 50 dividend-focused ETFs available to U.S. investors, and offers the highest yield of the group. This ETF seeks to replicate an index comprised of 100 of the highest yielding global stocks from around the globe, resulting in a diversified portfolio that includes various sectors and countries.
Because the SDIV portfolio holds the highest yielding stocks in the world, it can include companies with depressed stock prices and potentially risky operations. But in return for that risk investors get a yield of about 7.7%. And this fund has done quite well in 2012, returning more than 11% on the year so far [see yields on all dividend ETFs].
PowerShares KBW High Dividend Yield Financial Portfolio (KBWD)
As the name suggests, this ETF holds a portfolio of financial stocks with high dividend yields; many of the individual stocks have distribution yields that are approaching 10%. In aggregate, KBWD has a 30-day SEC yield of about 9.7%, and has yielded more than 10% over the past 12 months.
KBWD’s components are generally not Wall Street behemoths, but rather smaller banks and finance companies that may be risky holdings. Again, investors are compensated nicely for that risk with some of the highest yields available from any ETF [see yields on all financials ETFs].
ETRACS 2x Leveraged Long Wells Fargo Business Development Company ETN (BDCL)
This ETN offers leveraged exposure to Business Development Companies, an asset class that has the potential to deliver significant returns. In order to achieve certain tax advantages, BDCs pay out substantially all of their current earnings, resulting in yields that are considerably higher than most equities.
The index to which BDCL is linked has a yield of about 9.8%, and the leverage employed by BDCL pushes the yield to almost 19%.
2xMonthly Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL)
This ETN is one of several that offers exposure to MLPs, a corner of the domestic energy market that has become popular with investors looking to achieve meaningful yields. MLPL is the only ETP targeting this asset class that offers leveraged exposure, amplifying an already hefty yield to produce an security that can make distributions of more than 10%.
MLPs are relatively stable securities, but the use of leverage obviously has the potential to add some volatility to MLPL [see yields on all MLP ETFs and ETNs].
Guggenheim S&P Global Dividend Opportunities Index ETF (LVL)
This ETF offers exposure to a portfolio of global stocks sporting attractive dividend yields, including companies from both the U.S. and abroad. Domestic stocks make up about 25% of the holdings, with Germany (13%), Australia (9%), and France (6%) also receiving allocations. Financials and telecom stocks combine to make up about 50% of the portfolio.
LVL has about 100 individual holdings in total, and currently has a 12-month yield of more than 7%,
iShares B – Ca Rated Corporate Bond Fund (QLTC)
This ETF is one of several offering exposure to junk bonds, an asset class that has long been a source of big opportunity–and big risks. Unlike broad-based ETFs such as HYG and JNK, QLTC focuses on a narrow stretch of the credit quality curve by holding the lowest rated high yield debt securities. The result is a portfolio consisting of highly speculative bonds–some of which are near default–that have relatively high yields [see yields on all junk bond ETFs].
WisdomTree DEFA Equity Income Fund (DTH)
This ETF is linked to an index that holds dividend paying stocks from developed markets outside the U.S., including Europe, Australia, and Japan. The DTH portfolio includes several well known stocks; Total, BP, Novartis, and Vodafone are among the top holdings.
With a heavy allocation to European stocks, DTH can be a risky proposition. But there is an opportunity to capture a significant yield with this product; the 30-day SEC yield is about 5.2% and the distribution yield is close to 9%.
Disclosure; Long BDCL.
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- Highlighting The Kings Of The Dividend ETFs
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- Leveraged Dividend ETFs: Too Good To Be True?
- 12 High-Yielding Monthly Distribution Bond ETFs