Recently, I wrote an article about 4 ETFs that could potentially fit into your retirement portfolio that also happen to yield more than 10% right now (you can find it HERE). The key factor among them was that they were relatively conservative income-generating strategies. Two used covered calls to generate high yields. One invested in a diversified portfolio of closed-end funds. The fourth focused on traditionally higher yielding preferred securities.
This batch of four that I’m going to examine are a little more volatile. They mostly target narrower markets and niches and that can mean those 10%+ yields come at the expense of a little more risk. The good news is that they can make great portfolio diversifies and potentially reduce your overall risk level, but individually they can be a bit of a wild ride. That’s important to understand if you’re a retiree and relying on your nest egg to pay the bills.
As I did in the previous article, I’m going to break down how each of these funds work, how it invests and where the risks lie. Business development companies (BDCs), which appear on this list, aren’t necessarily intuitive investments and may not even be familiar to a lot of people. But they come with high yields and that means they’ll get a lot of attention from income seekers. As always, it’s important to look under the hood to know what you’re buying!
Let’s take a look at four (more) ETFs with 10%+ yields that could be worthy of a spot in your retirement portfolio.
iShares Emerging Markets Dividend ETF (DVYE)
Current Yield: 10.0%
Trailing 12-Month Yield: 9.4%
In just the past couple months, emerging markets have turned into one of the most intriguing equity plays in the market. They’re incredibly cheap. They’ve got the falling dollar as a tailwind. They’ve got the China reopening as a growth catalyst. Asia still has the cheap liquidity/modest inflation dynamic working in its favor. After roughly 13 years of U.S. stock leadership, we might finally be seeing the early stages of international investments taking the lead again.
DVYE uses a similar selection process as the iShares Select Dividend ETF (DVY), the fund that focuses on U.S. companies. It creates a portfolio of 100 dividend-paying stocks from emerging markets countries and weights them by dividend yield. What you end up with is an interesting all-cap mix of stocks that is fairly well-diversified across both region and industry.
This is going to be a riskier play than, say, the iShares Core MSCI Emerging Markets ETF (IEMG), which focuses more heavily on large-caps and disregards the high yield tilt. That’s the risk you take with DVYE, but investors also get rewarded with a yield that’s four times higher as well.
Here’s what else investors get with DVYE – a portfolio with a forward looking P/E ratio of under 5 (no, that’s not a typo) that trades for less than book value, both of which are less than half that of the broader emerging markets averages. The value is very compelling, but this is no doubt a more volatile investment that probably should be added only in small quantities.
Global X S&P 500 Risk Managed Income ETF (XRMI)
Current Yield: 11.6%
Trailing 12-Month Yield: 13.4%
In the first article, one of my choices was the Global X S&P 500 Covered Call ETF (XYLD), which is essentially an investment in the S&P 500 with written call options laid over the entire portfolio to boost yield. XRMI uses a similar covered call strategy, except that it buys a protective put on the portfolio as well. This is designed to mitigate some of the downside risk that comes with investing in stocks.
Has the strategy worked? It’s only been around for about a year and a half, but that year and a half involved perhaps the most drawn-out bear market we’ve seen since the financial crisis. It should be a relatively ideal environment for a fund, such as this one, to outperform.
The results so far, however, have been disappointing. Since the start of 2022, XRMI has underperformed XYLD by about 3%. I think the primary reason for this is the protective put. When there’s a bear market, put protection becomes very expensive and that eats into total returns. The other potential problem I see is that the put options are 5% out-of-the-money and have a 1-month expiration. The bear market right now has been pretty slow and steady. It has yet to experience the short, sharp decline where a 5% OTM put might really pay off. I think most of the protective puts are expiring worthless and that just ends up being a sunk cost for them.
That doesn’t mean I don’t like the strategy, but it does need the right conditions in order to work. If there’s are more sharp single day declines, the odds of XRMI outperforming likely increase. That just wasn’t the case in 2022. In the meantime, the benefit of the total call/put strategy is a yield of nearly 12% with a bit of downside protection built in. Not a bad deal overall.
Global X SuperDividend ETF (SDIV)
Current Yield: 11.8%
Trailing 12-Month Yield: 12.4%
SDIV could be the home run swing of high yield opportunities. Heck, it’s right in the name of the fund! Its strategy is simple – invest in the 100 highest yielding stocks in the world. It’s probably the ultimate equity high yield play, but the composition of the fund makes clear that this fund comes with a lot of risk.
The portfolio is quite concentrated. Roughly half of the fund’s assets are invested in financials and REITs (mostly mortgage REITs). That makes it exposed to almost every at-risk theme right now – soaring interest rates, recession risk, a potential housing crisis and a dried up lending market. On the plus side, it’s overweight to cyclicals and has almost no growth sector exposure, two things that have worked in SDIV’s favor in recent months.
Over its 11-year lifetime, the fund has a poor total return track record. Its heavy international tilt (just 28% of assets come from the United States) and focus on value-oriented dividend-paying stocks have all been out of favor for virtually its entire existence. That’s given it almost no chance to outperform, but conditions could change in the coming years. Like DVYE, the next several years (once we get past the current recessionary period) could bring SDIV back in favor again. As with the others on this list, only a small allocation is appropriate despite the huge yield.
VanEck BDC Income ETF (BIZD)
Current Yield: 10.3%
Trailing 12-Month Yield: 10.7%
BIZD is another ETF where it’s OK to get excited about the yield, but isn’t a fund that you want to overallocate to. This fund invests in companies whose primary goal is to service privately-held companies. That could include strategic guidance. It could involve lending to the business or buying an equity stake in the company. The big payoff, if it were to happen, would be to be a stakeholder when the company went public.
Of course, privately-held companies are speculative and risky. They’re not liquid investments and many of them don’t make it. They’re very prone to market cycles. The best BDCs, however, do a good job of focusing on the best and filtering out the rest. Their low correlation to other asset classes makes them an ideal risk diversifier in a portfolio.
The market environment probably isn’t ideal for privately-held companies, especially for those with aspirations to go public. BIZD actually is really only about as volatile as the S&P 500, so it shouldn’t necessarily be viewed as a pure gamble, but it should be considered risky. Again, a small allocation is OK within a broader portfolio.
BDCs, mortgage REITs and emerging markets probably aren’t the first investments you think of when filling out your retirement portfolio. There are some instances, however, where they do, in fact, make sense. Emerging markets is especially interesting at the moment and I’d encourage income investors to give strong consideration to this group.
The others may be more of an acquired taste, certainly the last two. You don’t necessarily want to throw your money at something you’re completely unfamiliar with and BIZD might fall into that category. The others might make more sense, although you’ll probably want to keep any potential allocations minimal. These can be great to provide a little yield pop, but maybe not so much as core pieces of your portfolio!
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