ETFs to Earn Income When Yields Elsewhere Are Low
April 16th 2010 at 11:00am by Tom Lydon
Yields on money funds and Treauries aren’t inspiring much elation. But there are still some ways to get some substantial yields on money that would otherwise just sit there, as long as you know where to look. Want a hint? Exchange traded funds (ETFs).
If you see higher yields on any investment, it usually means you must take on more risk. But if you play it smartly, you can improve returns without having to rely on the riskier options, remarks Jane J. Kim for The Wall Street Journal. A portfolio that performs over the long-term starts with diversity, since a drop in one area of the market is usually offset by gains in another.
Graphic courtesy of The Wall Street Journal; click to enlarge.
William Bernstein, who co-manages at Efficient Frontier Advisors, suggests spreading out investments. For taxable accounts, he advises a portfolio with 35% in Treasuries, 30% in muni bonds, 25% in short-term corporate bond funds and 10% in stocks. For tax-exempt vehicles, he advises 45% in Treasuries, 30% in short-term corporate bond funds, 15% in Treasury Inflation-Protected Securities and 10% in stocks. On average, the strategy would have resulted in annualized returns of around 4.8% and 4.9% for taxable and tax-exempt portfolios, respectively.
Of course, the portfolio strategy Bernstein outlines isn’t for everyone. Kim highlights some options for investors who seek other strategies.
- Safest bet: banks. Deposits of up to $250,000 are guaranteed by the government, at least until the end of 2013. Community banks offer higher yields than those at big commercial banks.
- Safe: inflation-protected bonds. Series I U.S. Savings Bonds yield 3.36% and are guaranteed not to lose value from inflation. Additionally, interest is exempt from state and local taxes and can be tax-free for some if used for education. Treasury inflation-protected securities (TIPs) are another option, but it should be noted that investors have bid up prices, pushing yields down. [Bond ETF Alternatives After Interest Rates Rise.]
- Risky: bond funds. High-quality bond funds provide better returns, but the value of the underlying security declines as interest rates rise. Short-term bonds are considered less volatile than long-term funds, like those that have 10 or 20+ years to maturity. If the Federal Reserve raises rates too quickly, short-term Treasuries and corporate bonds could lag behind intermediate and long-term bonds, comments the Vanguard Group.
Then there are also the multitude of ETF options available that offer respectable yields. However, chasing down yields isn’t everything. It is best to have a strategy in place to keep yourself in check. We use the 200-day moving average to determine when we’re in and when we’re out. When a position is above its 200-day, it’s a buy signal. When it drops below or 8% off the recent high, it’s a sell signal. [New Year, New ETF Strategy.]
- WisdomTree Dividend Ex-Financials (NYSEArca: DTN), 3.7% yield
- Vanguard High Dividend Yield Index (NYSEArca: VYM), 2.8% yield
- SPDR S&P Dividend (NYSEArca: SDY), 3.4% yield
- WisdomTree SmallCap Dividend (NYSEArca: DES), 3.4% yield
- iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY), 3.6% yield
- Vanguard Utilities (NYSEArca: VPU), 4% yield
- iShares Dow Jones U.S. Utilities (NYSEArca: IDU), 3.8% yield
- iShares S&P Global Utilities (NYSEArca: JXI), 3.8% yield
- Rydex S&P Equal Weight Utilities (NYSEArca: RYU), 4% yield
- iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG), 9.3% yield
- SPDR Barclays High Yield Bond (NYSEArca: JNK), 11.8% yield
Read the disclaimer; Tom Lydon is a member of the board of Rydex|SGI.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.