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Where to Find Yield in ETFs with Less Risk


Many investors are scrambling for yield in a low-rate market for bonds and the Federal Reserve seems committed to keeping it that way.

There are ETFs that can provide exposure to income-generating sectors with low costs and liquidity. However, investors just need to be careful and understand the risks when stretching for yield.

“The scramble for yield is the understandable outcome of years of rock-bottom interest rates. But understandable doesn’t mean sensible,” according to Morningstar ETF analyst Samuel Lee.

He warns against stretching into “junkier assets” to reach a desired level of income. “Avoiding the garbage does mean sacrificing yield,” he said.

Lee offers some suggestions from the ETF Income Portfolio from Morningstar’s ETFInvestor newsletter. They include emerging market equities, high-yield bonds with short durations, and low-volatility stocks.  [Junk Bond ETFs For Yield in 2013]

“The bad news is that yield is expensive right now. Because rates have stayed low for a really long time and look set to stay low, investors have gotten a bit desperate and pushed up valuations of high-yielding assets to lofty heights,” the analyst said. “I believe patience will likely be rewarded down the line with buying opportunities.”

Morningstar ETF Income Portfolio:

  • iShares MSCI EAFE Min Volatility (EFAV) : 9.7% weighting; 1.5% yield
  • iShares MSCI Emerging Market Min Vol Index (EEMV) : 10.3% weighting; 2.3% yield
  • PIMCO 0-5 Year High Yield Corporate Bond Index ETF (HYS) : 19.9% weighting; 5.1% yield
  • PIMCO Total Return ETF (BOND) : 31.6% weighting; 3.5% yield
  • PowerShaers S&P 500 Low Volatility (SPLV) : 9.6% weighting; 2.9% yield
  • WisdomTree Emerging Markets Equity Income (DEM) : 10.3% weighting; 3.6% yield
  • Cash: 8.8%

For more information on the fixed-income market, visit our bond ETFs category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own DEM and BOND.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.