The quest for yield has been going for years and there's little evidence that the environment is getting much better.
Treasury yields have risen by about 0.5% since their late summer 2020 low, but the 10-year is still only paying about 1.1%. High yield bonds just hit an all-time low yield of just over 4%.
Stocks don't offer much more. The S&P 500 yields 1.6%. If you go for the SPDR Portfolio S&P 500 High Dividend ETF (SPYD), which targets the 80 highest-yielding stocks from the S&P 500, you can earn 4.4% right now.
To find something that yields more than that, you have to target more niche or sector-oriented ETFs.
To be clear, these funds are risky. Many closed-end funds, for example, are heavily concentrated and may use leverage to enhance yields. Sector, especially those targeting energy or REITs, can be highly economically sensitive as investors found firsthand during the COVID bear market.
But these ETFs unquestionably satisfy the desire for high yield. With the worst of the economic recession seemingly behind us, vaccines being distributed and conditions slowly returning back to normal, there could be an investment case for some of these riskier market sectors again.
These funds are best used as satellite holdings to enhance the yield of a broader portfolio. Using them as core holdings could be dangerous, but adding a 9% yield in modest amounts to boost your income can be a smart strategy.
Here are 3 ETFs I follow that currently throw off 9% yields worth considering.
Virtus InfraCap U.S. Preferred Stock ETF (PFFA)
A traditional preferred securities fund is generally less risky than the broad stock market and is probably more comparable to a long-term Treasury fund in terms of volatility. A fund, such as the iShares Preferred & Income Securities ETF (PFF), can be had with a yield in the 4-5% range, making it an intriguing income option in its own right.
PFFA, however, takes it up a notch. It's an actively-managed fund that adds roughly 20-30% leverage to enhance beta as well as a covered call strategy in order to improve yield.
Unfortunately, the strategy hasn't worked in the fund's favor over its 2 1/2 year life. PFFA has produced an average annual return of -1% since inception versus a 6% return for the S&P U.S. Preferred Stock Index. Much of the damage was done during the 2020 bear market as credit risks escalated, but the tide has really turned after the 2nd quarter. Since June 30th, PFFA has gained 31% compared to a gain of just 7% for the index.
The direction of this ETF could depend on the strength of the economic recovery. Clearly, it performed well as business activity resumed, but the downtrend in the latest data could put a pause on the rally.
PFFA currently yields 9.2%. That number had been pretty consistent over the fund's life up until early 2020 when the distribution was cut in response to market conditions. An encouraging sign is that the $0.15 per share quarterly dividend was lifted to $0.16 just recently.
Global X MLP ETF (MLPA)
MLPs (and anything tied to the energy sector) have been in a rough spot for quite a while. Steadily declining oil prices, uneven demand, political risks and, of course, the COVID pandemic, have all had a negative effect on the value of high-yielding MLPs.
We've seen though in the post-COVID comeback that energy has turned around and become a leader. Energy ETFs, including downstream, midstream and upstream operators, have all rallied making this group a potential buy once again.
MLPA has a few things going for it. It's got a $700 million asset base, so liquidity issues and trading costs are limited. Plus, the expense ratio of just 0.46% is about 30% lower than the peer group average.
I probably don't need to tell you that risks have historically been high for MLPA (and all MLP ETFs for that matter) and returns are firmly in negative territory, but there's reason to be optimistic for the path forward. Short-term risks are unclear as the economic recovery slows and the vaccine distribution process struggles to ramp up. Given enough time, however, the coronavirus will subside and the economy will resume normal activity.
That means robust demand for the hospitality, restaurant and travel sectors as well as oil and other energies. I'm a believer that people may even try to "make up" for lost vacation opportunities creating further demand for energy and the industries that support.
MLPs are already responding very well in 2021 as evidenced by the fund's 8% year-to-date return after being up double digits earlier in the year. MLPA current yields 10.3%.
VanEck Vectors BDC Income ETF (BIZD)
Business development companies, whose primary business is private equity and venture capital, were another group that took it on the chin during the COVID pandemic. As many companies simply struggled to survived, the market for private equity dried up and share prices plummeted. BIZD finished 2020 down around 7%, but it fell more than 50% during the worst of last year's bear market.
Similar to the other sectors mentioned above, BIZD has made a big recovery as the economy rose from the ashes. Since the end of October 2020, BIZD has gained more than 30%.
Investing in BDCs is always a volatile proposition, but it's also rewarded shareholders with high yields. The success of this group in 2021 will largely hinge on whether or not the economic recovery can remain intact and lenders begin loosening up the purse strings.
BIZD offers a current yield of 9.6%.
VanEck Vectors Mortgage REIT Income ETF (MORT)
Mortgage REITs have been one of the worst performing sectors of the market. The COVID pandemic resulted in millions of lost jobs, which subsequently resulted in millions of homeowners and renters struggling to make their monthly payments. Many small businesses failed, office buildings were abandoned as workers shifted to home and shopping centers saw a fraction of their original traffic.
This hit virtually all areas of the real estate market hard - office REITs, mortgage REITs, mall REITs - but mREITs were among the worst. MORT ended up falling 70% in just a month and a half.
The story here is the same as well, however, as economic optimism has conditions looking improved and investors dipping their toes back in the water again. REITs still warrant a lot of caution as many reduced their shareholder distributions based on the state of the economy. Times are still lean, but there's reason for hope. MORT is up 27% in just the last three months.
MORT pays a current yield of 9.0%.