Not everybody wants to get rich quick. Some people are just looking for a modest return with below average risk. With that idea in mind, we’d like to highlight a few ETFs we’ve been buying recently. These ETFs share three things in common, they all:
- Currently yield 4% or more, paying interest monthly
- Have returned more than 5% annualized over the last 5 years
- Demonstrate considerably less volatility than the S&P 500
HYEM, high yield emerging market debt
HYEM is a high yield corporate bond fund that focuses on emerging markets. HYEM would be the equivalent of US-based HYG, which owns high yield debt in US based companies. HYEM currently yields 4.81% with an effective duration of 3.53. For comparison, HYG yields 3.45% with an effective duration of 3.76. In other words, for similar interest rate risk, you are being compensated way more by owning HYEM as opposed to HYG. In addition, HYEM has higher credit ratings than HYG.
The market may be catching on. Year-to-date, HYEM has seen more than $370 million flow into the fund while more than $3 billion has left HYG:
We continue to like Preferred stock ETFs
We’ve featured PFXF many times over the last year, most recently in this article. It has served us well and we continue to like the fund. At 5.25%, PFXF offers one of the highest yields of any preferred stock ETF in the market right now.
Two other preferred stock ETFs we own are PFFD and PFF. PFFD pays nearly 5% and PFF is around 4.50%. PFFD doesn’t have as much as history as the others, since it was incepted in 2017, but it’s seeing major inflows this year (possibly taking share from PFF):
If you plan to buy and hold, then we prefer PFFD and PFXF due to their higher yields. PFF, however, has exhibited the lowest volatility of the group. In addition, during the Covid crash in March 2020, PFF did the best job maintaining liquidity with a tight bid and ask spread, where as PFFD and PFXF spread out a little bit for a few days (as did many ETFs). While those were unprecedented times, and we don’t expect another liquidity blow out any time soon, PFF is definitely the leading preferred stock ETF for anyone who puts a premium on liquidity.
Comparing these funds versus SPY
The dynamics that make these types of funds most attractive is their high and frequent income payouts and lower volatility versus stocks. Investors should own these with a goal of income. They can act as complements to traditional bond exposure or replacements for conservative equity exposure. The following graph shows the historical volatility of HYEM, PFXF, and PFF versus SPY (note: PFFD is not included because it not a 5-year old fund):
PFF and HYEM have been considerably less volatile than SPY over the last 5 years. PFF, the only fund we feature with a 10 year history has displayed volatility that is 42% lower than that of SPY. That’s pretty nice for an income investor who wants to lessen some of the portfolio volatility that comes with owning stocks.
Here is how the funds compare on a performance basis:
PFXF and HYEM have been the best performers over the last 5 years, which you might expect given their higher volatility. It’s important to reiterate that the goal of owning these funds is to generate income. They are not likely to outperform the S&P 500, but they may offer a safer way to achieve a less volatile return. When considering how you construct your portfolio, don’t overlook funds like these. They can be especially valuable in retirement accounts where any earned interest is not taxed.
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