As workers hang up their hats and plan for their golden years, retirees are browsing through exchange traded funds to meet their income needs, and there are a lot of yield-producing options to choose from.
For instance, there are over 500 ETFs that offer better yields than 10-year U.S. Treasuries, and investors can breakdown the categories into equity, fixed-income and alternatives, writes Grant Engelbart, portfolio manager at CLS Investments, for InvestmentNews.
Among equity income options, investors will likely look at dividend-paying stock ETFs. While equity yields have been historically lower than fixed-income payouts, equities offer more attractive long-term capital appreciation. However, potential investors should be aware that stocks are typically more volatile than bonds, but dividend stocks are typically less volatile than the overall equities market.
Dividend investors can consider some high-quality paying stocks that have a history of raising dividends. For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) tracks U.S. stocks that have increased dividends for at least 10 consecutive years. The Schwab US Dividend Equity ETF (NYSEArca: SCHD) includes 100 stocks that showed consistent dividend payouts for at least 10 consecutive years. The SPDR S&P Dividend ETF (NYSEArca: SDY) holds firms that have a minimum dividend increase streak of 20 years. Looking at yields, VIG has a 2.14% 12-month yield, SCHD has a 2.69% 12-month yield and SDY has a 2.25% 12-month yield. [Retirees May Need More Stock ETFs to Meet Income Needs]
Potential investors should be aware the tax consequences as well. Dividends are passed through to ETF investors and may be taxed as qualified and ordinary income. The providers will publish the percentage of dividends paid that were qualified at the end of the year. ETFs that rebalance semi-annually or annually will lower the chance of non-qualified dividends.
For fixed-income exposure, there are over 250 U.S.-listed bond ETFs available. Investors can take a broad approach, such as the Vanguard Total Bond Market ETF (NYSEArca: BND), which tracks the Barclays U.S. Aggregate Bond Index, or pick and choose specific bond categories based on credit quality, issuer and region, among others. For example, the Aggregate Bond Index does not include municipal bond exposure, so an investor can consider a broad munis ETF like the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB). BND has a 1.94% 30-day SEC yield and MUB has a 1.58% 30-day SEC yield. [Aggregate Bond ETFs to Establish a Fixed-Income Portfolio’s Core]
Lastly, there are a number of alternative investments that offer attractive yields. The iShares S&P US Preferred Stock Index Fund (NYSEArca: PFF), the largest preferred stock ETF, has a 6.05% 12-month yield. The Vanguard REIT ETF (NYSEArca: VNQ), the largest real estate investment trust ETF, has a 3.75% 12-month yield. The Alerian MLP ETF (NYSEArca: AMLP), the largest master limited partnership related ETF, has a 6.65% 12-month yield. However, potential investors should be aware of the greater risks with these assets, such as preferred and REIT assets’ risks to rising interest rates. [High-Yield Preferred Stock ETFs for a Low-Rate Environment]
For more information on investing with ETFs, visit our ETF 101 category.
Max Chen contributed to this article.