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.

Luciano Siracusano, director of research at WisdomTree Investments, acknowledges the importance of expense ratios and yields, but advises investors to keep their eyes on the big picture.

"Cost is always important," he says. "But then, you need to look at yields as well as total returns. Total returns among funds can vary widely."

The WisdomTree Total Dividend Fund ( DTD) was launched in June, 2006 and has a yield of 3.25%. It tracks the WisdomTree Dividend Index with financials accounting for approximately a third of the fund's total weight.

General Electric ( GE), Exxon Mobil ( XOM), Johnson & Johnson ( JNJ) and Wal-Mart Stores ( WMT) are among the Total Dividend Fund's top holdings. The fund presently trades about 10% below its year-ago levels.

In addition to high-yield U.S. ETFs, investors might find it to be worth their while to consider ETFs that have an international focus.

Krause finds the WisdomTree Emerging Markets High-Yielding Equity Fund ( DEM) to be particularly attractive right now.

"Emerging markets have gotten quite expensive in recent months," he says. "This fund is an excellent way to get defensive and still maintain international exposure."

The Emerging Markets High-Yielding Fund was launched in July, and has Petroleo Brasileiro ( PBR), Taiwan Semiconductor Manufacturing Company ( TSM) and PetroChina ( PTR) among its top names. The fund tracks an index that has a dividend yield of 5.8%, and currently trades about 9% above its price from around the time of its inception last summer.

Although it does not focus specifically on emerging markets like the WisdomTree fund, the PowerShares International Dividend Achievers Fund ( PID) has a good deal of exposure to Western Europe and Canada. The fund yields 3.0% and has top holdings such as Tomkins ( TKS), Barclays ( BCS) and HSBC Holdings ( HBC).

These ETFs only begin to scratch the surface when it comes to available options that income investors have to choose from when selecting high-yield ETFs.

And Siracusano emphasizes the importance of the role that equity income funds can play in assembling a winning portfolio.

"We believe there is a connection between higher-yield portfolios and portfolios that outperform the market," he says.
At the time of publication, Billy Fisher owned shares of Petroleo Brasileiro.