The Risks of Pursuing Higher-Yielding ETFs

by: Gary Gordon

There may be 20-22 ETFs yielding 5.0% or more on an annualized basis. And on the surface, 5% via interest or dividend income sounds fantastic.

Yet every “pro” may be met with an equally compelling ”con.” For example, 5 of the 20+ income producers come from the land of Global Real Estate ETFs. Has the reflation of assets through worldwide stimulus pushed real estate in other parts of the world into a speculative bubble? Was Dubai merely a precursor to property developer debt woes?

High Yielding Global Real Estate ETFs
Name Symbol Category Yield
WisdomTree International Real Estate DRW Global Real Estate 9.5%
iShares FTSE EPRA/NAREIT Dev RE ex-US IFGL Global Real Estate 7.1%
First Trust FTSE EPRA/NAREIT Glb Real Es FFR Global Real Estate 6.0%
iShares S&P Dev ex-US Property Index WPS Global Real Estate 5.2%
iShares FTSE EPRA/NAREIT Dev Asia Idx IFAS Global Real Estate 5.1%

Perhaps you feel that you have enough exposure to real estate at home. So you’d rather pursue yield in the bond market. Yet here you face the threat of rising interest rates as well as carry trade risk and credit risk. (Click here for a more complete discussion of ETF risks.)

For instance, it’s quite conceivable that the Fed raises target rates from 0%-0.25% up to 0.75%-1.0% by year-end 2010. It is equally conceivable that the end of emergency stimulus programs as well as general investor unwillingness to buy the longer end of the yield curve (10yr-30yr) would push bond prices down. And that might offset any income earned from one’s treasury bond or investment grade corporate bond holdings.

Highest Yielding Bond ETFs
Name Symbol Category Yield
SPDR Barclays Capital High Yield Bond JNK High Yield Bond 12.2%
iShares iBoxx $ High Yield Corporate Bd HYG High Yield Bond 9.6%
PowerShares High Yield Corporate Bond PHB High Yield Bond 8.8%
PowerShares Emerging Mkts Sovereign Debt PCY Emerging Markets Bond 6.4%
iShares JPMorgan USD Emerg Markets Bond EMB Emerging Markets Bond 5.7%
iShares iBoxx $ Invest Grade Corp Bond LQD Long-Term Bond 5.5%
Vanguard Long-Term Bond ETF BLV Long-Term Bond 5.3%

Perhaps that leads you to the junk bond universe, where the yields are north of 8%. The problem here? Many corporate borrowers on the lower end of the credit risk scale still have significant refinancing needs. And if the economy doesn’t respond as well as everyone expects, default rates will be higher and junk bonds could struggle.

Emerging bond debt? It yields less than high-yield corporates. And plenty of folks are looking for the next Dubai. Heck… even developed countries like Greece, Ireland and Spain are on the country default watch list.

Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.