Owning ETFs is a good way of diversifying your investment portfolio without having to pick individual stocks.
They are also typically accessible to the individual investor and offer a way to spread the risk across a wide array of holdings.
But how do you find the best high yield ETF? Do you stick to broad market exposure or invest in specific industries or geographical locations?
Some investors choose their ETF based on company size with large, mid or small market capitalization.
However, if you are not sure what any of this means you will need some help in making a decision regarding your investment.
Even if you research for yourself what the best high yield ETF is for many people, having the aid of a broker is invaluable and often necessary.
We look at five of the best high yield ETFs available to help you find out what is on the market and to give some insight into these particular five funds.
The Vanguard High Dividend has the ticker symbol VYM and seeks to match the performance of the FTSE High Dividend Yield Index.
It was launched in 2006 and is a smart beta ETF which tracks non-capital weighted strategies.
These indexes attempt to choose stocks which have a greater risk-return performance based on fundamental characteristics.
VYM has amassed assets in excess of $42.67 billion thus making it one of the biggest ETFs in the Style Box – Large Cap Value market category.
VYM is one of the least expensive ETFs in this category and has operating costs annually of 0.06%. The fund has a 12-month trailing dividend yield of 2.92%.
ETFs provide diversified exposure and many give transparent disclosure about their holdings on a daily basis.
VYM has a heavy allocation in the financial sector accounting for more than 20% of the portfolio. Consumer staples and healthcare complete the top three holdings.
Johnson & Johnson make up 3.23% of the fund’s assets followed by Home Depot Inc and JPMorgan Chase & Co.
During the last 52-week period VYM has traded between $102.30 and $115.01 and is up 3.01% this year.
- Smart beta ETF tracking non-capital weighted strategies
- VYM accumulated assets of $42.67 billion
- One of the cheapest ETFs
- Provides diversified exposure
- Not for investors who prefer market cap-weighted indexes
This ETF has the ticker symbol SPYD and seeks to track the S&P 500 High Dividend Index.
It is one of a suite of portfolio building blocks aimed at providing diverse exposure to core asset classes.
SPYD is a low-cost ETF aiming to provide a high level of dividend income as well as an opportunity for capital appreciation. It was launched in 2015.
The index measures the performance of the top 80 high dividend-yielding companies in the S&P 500.
SPYD’s top ten holdings include a number of energy companies such as Valero Energy Corporation, Marathon Petroleum Corporation and ExxonMobil Corporation.
Energy holdings therefore account for around 16% of the fund with utilities taking up another 18%.
Another 14% of holdings are in the financial sector, 11% in consumer staples and 10% in healthcare.
The fund has assets under management (AUM) of $7.7 billion and an expense ratio of 0.07%. Over the last year SPYD has traded between $38.38 and $45.49.
- Low cost ETF seeking to provide high level of dividend income
- Assets under management of $7.7 billion
- Top exposure spread over energy, utilities, and consumer staples
- Not geographically diverse with only 1.3% outside the US
The ticker symbol for Schwab U.S. Dividend Equity ETF is SCHD.
It tracks the Dow Jones U.S. Dividend 100 Index which is a market capitalization weighted index with more than 100 U.S. large-cap stocks.
These are characterized by high dividend yield.
The fund was launched in 2011 and offers a diversified portfolio of stocks selected for strength and based on financial ratios. There are 104 different holdings in this fund including Coca-Cola Inc, IBM and Pfizer.
SCHD is a highly liquid fund with assets under management of $36 billion and a passive management style making it an inexpensive option with an expense ratio of just 0.06%.
Sector weighting is mainly financial, industrial and technology.
Over the last year the fund has traded between $74.03 and $81.94 with a 50-day moving average of $76.96. It pays a 30-day SEC yield of 3.1%.
- Tracks the Dow Jones U.S. Dividend 100 Index, an index characterized by high dividend yield stocks
- Highly liquid fund
- More than $36 billion assets under management
- Virtually no geographical diversification with 99.3% of holdings in the US
iShares Select Dividend ETF tracks the Dow Jones U.S. Select Dividend Index and has the ticker symbol DVY.
This diversified fund was launched in 2003 and has the option to access domestic dividend stocks.
The fund has a weighting of 26.8% in utilities, 20% in financials and 10.25% in consumer staples.
Assets under management are $23 billion and the fund has a daily trading volume of over 1 million shares.
DVY has 100 holdings and offers exposure to high dividend space that leans toward smaller companies paying consistent dividends.
The top three holdings are Valero Energy Corporation at 2.57%, Altria Group Inc at 2.27%, and International Business Machines Corporation at 1.99%.
With a high 30-day SEC yield of 3.4% distributions are paid on a quarterly basis. Over the last year the DVY has traded between $111.53-$131.54.
DVY is a passively managed fund but is nevertheless quite expensive with an expense ratio of 0.38%.
- Skewed toward smaller companies with a record of paying dividends consistently
- Assets under management of $23 billion
- High 30 day SEC yield of 3.4%
- Expense ratio of 3.8% is high and one of the more expensive ETF options
Global X SuperDividend U.S. ETF seeks to track the Indxx SuperDividend U.S. Low Volatility Index.
It has the ticker symbol SRET and focuses on high yielding real estate investments such as mREITs and REITs. Inception of the fund was in 2015.
The fund has around 30 holdings which are split 60/40 between REITs and mREITs.
REITs are companies that own or finance income producing real estate. mREITs are mortgage real estate investment trusts that provide financing by purchasing mortgage backed securities.
Some of the top holdings for SRET are W.P. Carey, a retail space operator, Gaming and Leisure Properties, a casino company and Getty Realty Corp whose portfolio is 74% convenience and gas.
30-Day SEC yield is 7.13% and net assets are at $312.23 million. The fund accesses some of the highest yielding REITs in the world so has high income potential.
The expense ratio for Global X SuperDividend U.S. ETF is high at 0.58%.
- Accesses 30 of the highest yielding REITs in the world
- The fund is therefore geographically diversified
- SRET has made monthly distributions consistently for the last seven years
- Potential for volatility especially in mREITs
- Expense ratio is high
Indexes measure specific financial markets or segments of that market.
Their overall price, risk and return are used as standard worldwide measurements, and they represent the wide opportunities that investors have available to them in the marketplace.
ETFs seek to track their index as closely as possible. However none of them will be able to perfectly match its underlying index.
There will always be some tracking error which is the difference between the market price of the ETF and the net asset value (NAV) of the fund.
Index tracking ETFs are a good option for Individual investors as they are relatively low cost and the ability to adjust their allocation according to their changing reward/risk profiles.
Vanguard High Dividend ETF tracks the FTSE High Dividend Yield Index which is the global component of the FTSE Global Equity Index Series (GEIS).
It includes stocks with the highest dividend yields.
SPDR Portfolio S&P 500 High Dividend ETF tracks the S&P 500 High Dividend Index which measures the performance of eighty companies within the S&P 500 with high yield stocks.
It is an equally weighted index.
Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index. This is a market capitalization weighted index with more than 100 U.S. large-cap stocks.
iShares Select Dividend ETF tracks the Dow Jones U.S. Select Dividend Index which is an index of 100 stocks from US companies with leading dividend yield.
Global X SuperDividend U.S. ETF tracks the Indxx SuperDividend U.S. Low Volatility Index which measures the market performance of US companies that have low beta and high dividend yield.
Holdings & Sector Allocation
It is important to know the stocks that your ETF owns and not just rely on its name.
Although these funds are attractive for investors looking to spread their investments over dozens of stocks that shouldn’t mean being unaware of what is in the fund.
Many ETFs will give transparent disclosure on their holdings on a daily basis but even if they don’t, it is not difficult to find out exactly what stocks you have invested in via your ETF.
Vanguard High Dividend ETF has 20% of its holdings in the financial sector, 14.4% in healthcare and 12.8% in consumer staples.
Stocks include Johnson & Johnson, Home Depot Inc and JPMorgan Chase & Co.
SPDR Portfolio S&P 500 High Dividend ETF has 16% of its holdings in energy with companies like Valero Energy, ExxonMobil and Marathon Petroleum.
Schwab U.S. Dividend Equity ETF is weighted in financial markets followed by industrials, technology, consumer defensive and healthcare.
Company stocks include Merck & Co Inc, International Business Machines Corp and Coca-Cola Co.
iShares Select Dividend ETF has a 26.9% weighting in the utilities sector, 21% in the financial sector and 9.79% in consumer defensive stocks.
The rest is spread over stocks in the consumer cyclical sector as well as energy and communication services among others.
Global X SuperDividend U.S. ETF has 17.89% weighting in the financial sector but almost as much in real estate at 16.60%.
Consumer defensive, industrial and utilities sectors are among the other top stocks in this fund.
Unlike mutual funds an ETF does not charge a load, an amount that is payable when buying or redeeming shares in a mutual fund.
Instead ETFs are traded directly on an exchange, but a brokerage commission may be payable.
These commissions can vary but are typically no more than $20.
However if an investor regularly puts small amounts of capital into a fund brokerage fees can mount up. For this type of investment a mutual fund may be more advantageous.
ETFs are frequently passively managed and as such the expense ratio is typically lower than mutual funds.
The expense ratio is the cost of operating the fund, i.e. fees divided by the average assets of the fund charged to the shareholders.
Before investing in an ETF it is good practice to check the expense ratio. A good investment ETF should have an expense ratio of no more than 1%.
VYM has operating costs annually of 0.06%, SPYD has an expense ratio of 0.07%, SCHD’s fees are 0.06%, DVY’s expense ratio is high at 0.38% and SRET’s is even more expensive at 0.58%.
The performance of an ETF is based on its efficiency with an efficient ETF producing maximum results with minimal input. Or in other words a passively managed but high yielding ETF.
An ETFs main input is its expense ratio explained above. The fund’s efficiency is assessed by weighing its fee against how well it tracks its index.
If the ETF’s expense ratio is low, and it replicates its index tightly then it is a highly efficient fund.
You can check how well an ETF replicates its index or benchmark through the tracking difference.
This metric consolidates the effects of a wide range of management decisions from optimization decisions to securities lending.
As the main job of an ETF is to track its underlying index a fund that deviates from it even for a short period of time is deemed less efficient or poorly managed.
Frequently Asked Questions
How Does A High Yield ETF Work?
ETFs buy shares of stocks and when those stocks pay dividends those payments are passed to the investor. This could be through cash or additional shares for re-investment.
Most ETFs pay dividends quarterly on a pro rata basis so according to how many shares are owned by an investor.
Are High Dividend Yield ETFs Good?
While high dividend yield ETFs are a good investment option the returns can be largely in the form of dividends.
If they are in a taxable account you will be paying tax on those dividends annually. However if they are in a tax deferred account this is not an issue.
What Is A Good Yield For An ETF?
The top 100 ETFs range in yield from 26% to 5%. Dividend yields are calculated by dividing the latest dividend payment by the price of the ETF.
How Many ETFs Should I Own?
If you want an all ETF portfolio a good number to own would be between five and ten.
However it should be diversified geographically and asset class such as stocks, bonds or commodities. Bear in mind however, that ETFs by their very nature are already diversified.
Owning ETFs gives an investor an efficient means of income from dividend paying companies.
However, while investors may choose high yield ETFs for income and wealth building there is always an element of risk in any type of investment.
The high yield ETF that you choose will reflect your particular approach to risk. Someone who is planning for retirement may have a more conservative approach to investing than someone with a less risk-averse strategy.
Even with a portfolio that is diversified both in terms of asset class and geographical location global events can have an impact.
It is beneficial to seek the advice of a professional broker before investing in high yield ETFs or any other investment type.
We hope this guide to the best high yield ETFs available has been of benefit to you and helps with your investment decision.