Investors have picked over the ETF universe in search of any kind of yield in an extremely low-rate market for bonds. As a result, ETFs tracking many traditional high-yield sectors have been bid up to expensive levels, but there are still places investors can go for income without paying nosebleed valuations.
"Unfortunately, valuations [for dividends, high-yield junk bonds, MLPs, and REITs] are approaching sky high levels in many instances as more investors fall in love with these products. As a result, some investors might want to consider other avenues in order to generate income for their portfolios at this time," Zacks Equity Research wrote.
There are still untapped corners of the market that may appeal to investors who are seeking income at a relatively reasonable price. Crossover bond ETFs are fixed income investments that track the lower end of the investment grade bond spectrum and higher end of non-investment grade bonds. The result is a higher payout with a lower risk of default risk, Zacks notes. The SPDR B of A Merrill Lynch Crossover Corporate Bond ETF (XOVR) launched last June and has about $16 million in assets under management. So far, the ETF has returned 6.26% since trading day one and has a yield of 3.26%.
Preferred stocks are another source of income. These are hybrid investments that have traits of both stocks and bonds. According to Zacks, they have a fixed rate of dividends on their face value but they are influenced by interest rates in the economy as well as credit rated like fixed income securities. Payment for preferred shares are disbursed after bond holders, but before common shareholders of the company. The iShares U.S. Preferred Stock ETF (PFF) is made up of banking and financing companies. PFF has returned 18.25%, with a yield of 6.02%. Preferred stocks continue to be a source of high yields.
While it may be a challenge for investors to garner decent yields from asset classes that were, or are, part of a core income strategy, there are plenty of choices out there from alternative categories. Investors just need to be aware of any risks and decide if the tools will work within their current strategy.
SPDR B of A Merrill Lynch Crossover Corporate Bond ETF
Tisha Guerrero contributed to this article.