The greater the risk, the greater the reward, as the old adage goes. When it comes to yield funds, that’s mostly true. High-yield assets are for investors looking to make income from buying and holding their investments. While investor taste for risk has mostly declined with the market’s volatility, high-yield funds remain an option for those investors steadfast enough to weather the market swings.
In the current economic climate, high-yield investment vehicles are in the spotlight.
And investors are responding by shopping around for new investment vehicles that produce yield. Here’s what you should know
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What is yield?
Yield at its most basic level is income generated from investments while they are held by an investor. Yield describes “a certain amount earned on a security, over a particular period of time. It refers to the interest or dividend earned on debt or equity, respectively, and is conventionally expressed annually as a percentage based on the current market value or face value of the security.”
Typically, yield is quantified by an annual percentage rate based on three factors: (1) the investment’s cost, (2) the investment’s current market value, or (3) the investment’s face value. Yield measures the total income that a particular investment earns in interest and dividends.
Yield does not include capital gains, which is the increase in an investment’s value that you can realize upon selling an asset.
When it comes to yield, there are a number of different ways to approach it, some of which are riskier than ever. Here are investment products that offer yield that have the potential to help your investment portfolio.
High-Yield ETFs
Exchange-traded funds (ETFs) offer an assortment of holdings, allowing investors to avoid putting all of their eggs into one a basket of a single stock. ETFs tend to have lower fees, offer greater diversification, and offer greater liquidity than other types of investment funds.
High-Yield ETFs that are not bond related are typically considered to be Dividend ETFs. Dividend ETFs are for investors who want consistent income. Dividend funds provide “regular distributions provide a reliable flow of cash amid other uncertainties.”
While perks include: (1) a variety of investment opportunities, (2) the potential for income from investments, (3) a broad range of specialized funds, and (4) low fees. On the other hand, drawbacks can include: (1) that funds must match a benchmark index, (2) the high risk due to associated junk bonds, (3) sensitivity to rising interest rates, and (4) general unpredictability.
Still, for investors seeking consistent income via yield as opposed to the sale of assets, High-Yield ETFs are worth consideration.
For example, the following have delivered yields of 5%: ETFs iShares Broad USD High Yield Corporate Bond ETF (USHY), Global X U.S. Preferred ETF (PFFD), SPDR Portfolio S&P 500 High Dividend ETF (SPYD), Energy Select Sector SPDR ETF (XLE), Vanguard Global ex-U.S. Real Estate ETF (VNQI), and Global X SuperDividend REIT ETF (SRET).
High-Yield Bond Funds
High-yield bond funds are also known as junk bonds. And for many, that enough might be cause for pause.
What’s so junky about higher yields? In this case it is due to the fact that those yields come at the cost of credit ratings. Typically, credit quality ratings of the entities issuing the bonds are “below investment grade.” Bonds rated lower than BBB on the Standard & Poor’s and Fitch scale or Baa3 on Moody’s or better are considered less than “investment-grade,” also known as “speculative,” “high-yield,” or “junk” bonds. These bonds can be more susceptible to economic and credit risks.
But, “in an environment where some ultra-safe U.S. Treasury notes have a lower yield than the current inflation rate, some income investors may be willing to accept a little extra risk for the higher yield on their investment,” according to a report by U.S. News.
That said, high-yield bonds, which have performed well in previous economic recoveries, seem to be falling short this time around. For example, as of the end of September, the high-yield bond market had gained 26% since March, whereas the S&P 500 had gained 51%.
Bond ETFs
Through October 2020, inflows to bond funds totaled $170 billion, exceeding to $154 billion in all of 2019. Part of those funds are thanks to the Federal Reserve, which purchased corporate debt ETFs after the initial economic downturn in March. This backing signaled confidence to investors, ushering in a wave of purchases.
Bond ETFs hold hundreds and sometimes thousands of individual bonds. While investors can opt for high-yield ETFs, they can also opt for intermediate-term investment-grade bonds, which tend to be less risky.
Why focus on investment yield?
Whether or not yield investments make sense for a portfolio comes down to each individual’s situation. Some investors have the time to buy and hold, waiting out the market for years before retirement. But others may not have that luxury, particularly if they are nearing retirement and don’t want to put too much of their capital at risk, rather using it as an income source.
For those investors interested in yield, a search on Magnifi reveals a number of different ETF and mutual fund options.
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