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How to Find the Best High-Yield ETFs

Erratic market conditions often lead investors to seek out defensive investment options.

One such area of the market that could be given consideration in times like these is high-yield ETFs. While there are a number of ETFs out there with relatively high yields, a reasonable amount of due diligence should be done in differentiating between the potential alternatives.

For investors who are looking to go down the path of high-yield ETFs, the question arises, what characteristics are the most important to keep in mind?

"Quality, yield and safety," says Philip Yockey, President and Chief Investment Officer of Tactical Analytics, an independent private research company.

Michael Krause, President of AltaVista Independent Research, agrees with Yockey on the importance of yield, but also underscores the importance of analyzing the underlying composition of high-yield ETFs.

"The yield and the expense ratio are important to consider, since the expense ratio will eat into your dividend payments," he said. "Investors should also look at the sector balance of high-yield ETFs. Some are very heavily skewed towards the financial sector right now."

The iShares Dow Jones Select Dividend Index (DVY) is a prime example of an ETF that is heavily weighted with financials. Financial service companies account for nearly half the fund's total weight. It has a 4.3% yield, and a concentration of financials nearly three times that of the S&P 500.

DVY has top holdings that include PNC Financial Services Group (PNC), KeyCorp (KEY), AT&T (T) and Bank of America (BAC).

Because of this heavy concentration in financials, the fund has underperformed the market over the past 52 weeks. The fund is down 19.3% vs. a year ago.

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