Investors are turning to junk bond and dividend ETFs for income in a low-rate environment. High-yield ETFs invest in bonds, while dividend funds target the stock market, so the two groups can perform differently.
"The key is to build a portfolio with the bulk of your portfolio in core diversified asset classes, and then to explore more exotic ETFs," Michael Iachini, director and ETF expert with Charles Schwab Investment Advisory, said in an AdvisorOne article.
Schwab recommends ETF investors follow a "core and explore" investment strategy. The core diversified asset classes are suitable for long-term holdings, like U.S. large- and small caps, broad international stocks, U.S. investment grade bonds and cash. On the other hand, riskier explore ETFs include high-grade bonds, emerging markets, focused sectors, sovereign debt and commodities.
When weighing high-yield junk bonds against equities, Iachini considers high-yield debt as equity-like in the way they act.
"Investors are hungry for yield, and it gets tougher and tougher to capture yield without taking on risk," Iachini added.
Global X also recently came out with a study revealing that dividend high dividend payers repeatedly outperformed non-dividend payers.
"Conventional wisdom holds that higher dividends mean lower performance, but our research shows the exact opposite," Bruno del Ama, chief executive of Global X Funds, said.
Many investors are using dividend ETFs as a way to dip a toe in the stock market with a more conservative strategy and income to boot. News over the weekend from Cyprus is a reminder of the macro risks still lingering in the market.
Dividend ETFs include:
- Global X SuperDividend (SDIV): 6.88% 30-day SEC yield
- SPDR S&P Dividend (SDY): 2.58% 30-day SEC yield
- Vanguard High Dividend Yield (VYM): 3.13% 30-day SEC yield
High-yield bond ETFs include:
- AdvisorShares Peritus High Yield ETF (HYLD): 8.22% 30-day SEC yield
- iShares iBoxx High Yield Corporate Bond (HYG): 5.0% 30-day SEC yield
- SPDR Barclays High Yield Bond (JNK): 5.11% 30-day SEC yield
Max Chen contributed to this article.
Full disclosure: Tom Lydon's clients own HYG and JNK.