Investing for Income with ETFs
Income investors can lower costs, improve flexibility and reduce their tax bill by switching from mutual funds to exchange traded funds (ETFs).
Lower costs means more income
ETFs have an expense ratio that is, on average, 100 basis points lower than the average mutual fund. On a $1 million portfolio, that adds up to $10,000 a year in additional income just by switching to ETFs.
Trade when you want
Mutual funds require that investors buy and redeem after the market is closed at a price that is revealed after the fact. ETFs empower income investors to buy and sell funds anyttime the market is open and in control of the price.
No capital gains distributions means a smaller tax bill
Investing in mutual funds opens up investors to a potential capital gains distribution tax liability. Some experts estimate that captial gains tax bill hurts mutual fund investors to the tune of 200 basis points every year.
On a $1 million portfolio, that's an additional $20,000 of income that is lost by sticking with mutual funds. The structure of ETFs mostly eliminates the capital gains distribution headache.
Income investors looking to generate cash flow with ETFs can choose from fixed income, dividend and international funds.
There is an ETF for almost every category of fixed income security. The most popular Government ETF is iShares' $9 billion Lehman 1-3 Year Treasury Bond Fund (SHY). The fund tracks an index that includes all publicly issued, U.S. Treasury securities that have a remaining maturity of between 1 and 3 years. As of 7/16/08, the distribution yield was 3.2%.
Vanguard offers the Vanguard Total Bond Market ETF (BND).
The fund tracks an index that measures a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities. The weighted average maturity is 5 to 6 years and carries a yield of 4.8% as of 7/16/08.
State Street's SPDR Lehman High Yield Bond ETF (JNK) includes publicly issued U.S. dollar denominated, non-investment grade, fixed-rate, taxable corporate bonds that have a remaining maturity of at least one year, regardless of optionality, are high-yield using the middle rating of Moody's, S&P, and Fitch, respectively. As of 7/16/08, the ETF's current yield was 9.8%.
The largest dividend ETF is the $5.7 billion iShares' Dow Jones Select Dividend Index Fund (DVY). The ETF tracks an index that screens stocks by dividend-per-share growth rate, dividend payout percentage rate and average daily dollar trading volume, and selects based on dividend yield. As of 7/16/08, the fund's distribution yield was 5.1%.
For preferred stocks, iShares' S&P U.S. Preferred Stock Index Fund (PFF) tracks an index that measures the performance of a selected group of preferred stocks listed on the New York Stock Exchange, the American Stock Exchange and the Nasdaq Stock Market, Inc. The fund's 30 day SEC yield was 7.35% as of 6/30/08.
Income investors should consider the diversification potential of international ETFs with an income focus. State Street's SPDR Lehman International Treasury Bond ETF (BWX) tracks an index of fixed-rate local currency sovereign debt of investment-grade countries outside the United States. As of 7/16/08, the fund's current yield was 4.1%.
The WisdomTree International SmallCap Dividend Fund (DLS) measures the performance of the small-capitalization segment of the dividend-paying market in the industrialized world outside the U.S. and Canada.
Income investors should also consider REIT ETFs.
1. Lehman 1-3 Year Treasury Bond Fun (SHY) - $9.0 billion
2. Lehman TIPS Bond Fund (TIP) - $6.9 billion
1. Vanguard High Dividend Yield ETF (VV) - 0.07%
2. Vanguard Short-Term Bond ETF (BSV) - 0.11%
1. SPDR Lehman High Yield Bond ETF (JNK) - 9.8%
2. S&P U.S. Preferred Stock Index Fund (PFF) - 7.35%
|ETF Name||Ticker||Asset Class||Yield||Size ($MM)||Expense Ratio (%)||Sponsor|
|ETF Name||Ticker||Asset Class||Yield||Size ($MM)||Expense Ratio (%)||Sponsor|
|Guggenheim Bulletshares 2011 Corporate Bond ETF||BSCB||Fixed Income (FI)||0.0||34||0.24||Guggenheim|
|Guggenheim Bulletshares 2012 Corporate Bond ETF||BSCC||Fixed Income (FI)||0.0||65||0.24||Guggenheim|
|Guggenheim Bulletshares 2013 Corporate Bond ETF||BSCD||Fixed Income (FI)||0.0||66||0.24||Guggenheim|
|Guggenheim Bulletshares 2014 Corporate Bond ETF||BSCE||Fixed Income (FI)||0.0||50||0.24||Guggenheim|
|Guggenheim Bulletshares 2015 Corporate Bond ETF||BSCF||Fixed Income (FI)||0.0||32||0.24||Guggenheim|
|Guggenheim Bulletshares 2016 Corporate Bond ETF||BSCG||Fixed Income (FI)||0.0||25||0.24||Guggenheim|
|Guggenheim Bulletshares 2017 Corporate Bond ETF||BSCH||Fixed Income (FI)||0.0||29||0.24||Guggenheim|
|Guggenheim Bulletshares 2012 High Yield Corporate Bond ETF||BSJC||Fixed Income (FI)||0.0||25||0.42||Guggenheim|
|Guggenheim Bulletshares 2013 High Yield Corporate Bond ETF||BSJD||Fixed Income (FI)||0.0||23||0.42||Guggenheim|
|Guggenheim Bulletshares 2014 High Yield Corporate Bond ETF||BSJE||Fixed Income (FI)||0.0||13||0.42||Guggenheim|
|Guggenheim Bulletshares 2015 High Yield Corporate Bond ETF||BSJF||Fixed Income (FI)||0.0||10||0.42||Guggenheim|
|Guggenheim Multi-Asset Income ETF||CVY||Allocation||0.0||490||0.60||Guggenheim|
|Guggenheim International Multi-Asset Income ETF||HGI||Allocation||0.0||104||0.65||Guggenheim|
|Claymore US Capital Markets Bond ETF||UBD||Fixed Income (FI)||0.0||5||0.27||Guggenheim|
|Claymore US Capital Markets Micro-Term Fixed Income ETF||ULQ||Fixed Income (FI)||0.0||5||0.27||Guggenheim|
|Barclays Capital Aggregate Bond Fund||AGG||Fixed Income (FI)||1.7||11,265||0.24||iShares|
|iShares Barclays Agency Bond Fund||AGZ||Fixed Income (FI)||0.9||374||0.20||iShares|
|Barclays Capital Credit Bond Fund||CFT||Fixed Income (FI)||3.1||821||0.20||iShares|
|Barclays Capital Intermediate Credit Bond Fund||CIU||Fixed Income (FI)||2.4||3,341||0.20||iShares|
|iShares 10+ Year Credit Bond Fund||CLY||Fixed Income (FI)||5.1||21||0.20||iShares|
|Barclays 1-3 Year Credit Bond Fund||CSJ||Fixed Income (FI)||1.1||7,902||0.20||iShares|
|Barclays Capital Government/Credit Bond Fund||GBF||Fixed Income (FI)||1.9||108||0.20||iShares|
|iShares 10+ Year Government/Credit Bond Fund||GLJ||Fixed Income (FI)||4.3||21||0.20||iShares|
|Barclays Capital Intermediate Government/Credit Bond Fund||GVI||Fixed Income (FI)||1.3||553||0.20||iShares|
|iBoxx $ High Yield Corporate Bond Fund||HYG||Fixed Income (FI)||7.2||8,808||0.50||iShares|
|Barclays Capital 7-10 Year Treasury Bond Fund||IEF||Fixed Income (FI)||2.2||2,869||0.15||iShares|
|Barclays Capital 3-7 Year Treasury Bond Fund||IEI||Fixed Income (FI)||1.1||1,377||0.15||iShares|
|iBoxx $ Investment Grade Corporate Bond Fund||LQD||Fixed Income (FI)||3.7||13,388||0.15||iShares|
|S&P National Municipal Bond Fund||MUB||Fixed Income (FI)||2.7||2,024||0.25||iShares|
|S&P New York Municipal Bond Fund||NYF||Fixed Income (FI)||2.5||82||0.25||iShares|
|Barclays Short Treasury Bond Fund||SHV||Fixed Income (FI)||0.1||4,365||0.15||iShares|
|Barclays 1-3 Year Treasury Bond Fund||SHY||Fixed Income (FI)||0.2||8,345||0.15||iShares|
|iShares S&P Short Term National Municipal Bond Fund||SUB||Fixed Income (FI)||0.7||411||0.25||iShares|
|Barclays Capital 10-20 Year Treasury Bond Fund||TLH||Fixed Income (FI)||2.9||216||0.15||iShares|
|Barclays Capital 20+ Year Treasury Bond Fund||TLT||Fixed Income (FI)||3.7||2,958||0.15||iShares|
|PIMCO Build America Bond Strategy Fund||BABZ||Fixed Income (FI)||6.0||32||0.45||PIMCO|
|PIMCO Investment Grade Corporate Bond Index Fund||CORP||Fixed Income (FI)||3.5||83||0.20||PIMCO|
|PIMCO 3-7 Year U.S. Treasury Index Fund||FIVZ||Fixed Income (FI)||0.0||21||0.15||PIMCO|
|PIMCO 15+ Year US TIPS Index Fund||LTPZ||Fixed Income (FI)||0.0||276||0.20||PIMCO|
|PIMCO Enhanced Short Maturity Strategy Fund||MINT||Fixed Income (FI)||0.5||881||0.35||PIMCO|
|PIMCO Intermediate Municipal Bond Strategy Fund||MUNI||Fixed Income (FI)||1.7||84||0.35||PIMCO|
|PIMCO Short Term Municipal Bond Strategy Fund||SMMU||Fixed Income (FI)||1.0||28||0.35||PIMCO|
|PIMCO 1-5 Year U.S. TIPS Index Fund||STPZ||Fixed Income (FI)||0.0||1,082||0.20||PIMCO|
|PIMCO 7-15 Year U.S. Treasury Index Fund||TENZ||Fixed Income (FI)||0.0||8||0.15||PIMCO|
|PIMCO Broad U.S. TIPS Index Fund||TIPZ||Fixed Income (FI)||0.0||51||0.20||PIMCO|
|PIMCO Broad U.S. Treasury Index Fund||TRSY||Fixed Income (FI)||0.0||10||0.15||PIMCO|
|PIMCO 1-3 Year U.S. Treasury Index Fund||TUZ||Fixed Income (FI)||0.0||107||0.09||PIMCO|
|PIMCO 25+ Year Zero Coupon U.S. Treasury Index Fund||ZROZ||Fixed Income (FI)||0.0||41||0.15||PIMCO|
|PowerShares Senior Loan ETF||BKLN||Fixed Income (FI)||3.7||118||0.83||PowerShares|
|Convertible Securities Portfolio||CVRT||Fixed Income (FI)||2.9||9||0.35||PowerShares|
|KBW High Dividend Yield Financial Portfolio||KBWD||Equities||0.0||14||0.93||PowerShares|
|PowerShares CEF Income Composite Portfolio||PCEF||Equities||0.0||209||1.81||PowerShares|
|Fundamental Investment Grade Corporate Bond Portfolio||PFIG||Fixed Income (FI)||1.6||33||0.22||PowerShares|
|High Yield Corporate Bond Portfolio||PHB||Fixed Income (FI)||7.9||471||0.50||PowerShares|
|Active Low Duration Fund||PLK||Fixed Income (FI)||1.5||11||0.29||PowerShares|
|1-30 Laddered Treasury Portfolio||PLW||Fixed Income (FI)||3.4||285||0.25||PowerShares|
|UltraShort Barclays Capital 7-10 Year Treasury||PST||Fixed Income (FI)||0.4||281||0.95||ProShares|
|Short 20+ Year Treasury||TBF||Fixed Income (FI)||0.0||753||0.95||ProShares|
|UltraShort 20+ Year Treasury||TBT||Fixed Income (FI)||0.4||5,530||0.95||ProShares|
|Ultra 20+ Year Treasury||UBT||Fixed Income (FI)||0.0||29||0.95||ProShares|
|Ultra 7-10 Year Treasury||UST||Fixed Income (FI)||0.0||12,130||0.95||ProShares|
|Schwab Short-Term U.S. Treasury ETF||SCHO||Fixed Income (FI)||0.5||100||0.12||Schwab|
|Schwab Intermediate-Term U.S. Treasury ETF||SCHR||Fixed Income (FI)||1.7||40||0.12||Schwab|
|SPDR Barclays Capital 1-3 Month T-Bill ETF||BIL||Fixed Income (FI)||0.6||738||0.13||State Street|
|SPDR Barclays Capital Issuer Scored Corporate Bond ETF||CBND||Fixed Income (FI)||0.0||12||0.16||State Street|
|SPDR Barclays Capital Convertible Securities ETF||CWB||Fixed Income (FI)||3.4||898||0.40||State Street|
|SPDR Barclays Capital Intermediate Term Treasury ETF||ITE||Fixed Income (FI)||2.5||212||0.13||State Street|
|SPDR Barclays Capital Intermediate Term Credit Bond ETF||ITR||Fixed Income (FI)||0.0||159||0.15||State Street|
|SPDR Barclays Capital High Yield Bond ETF||JNK||Fixed Income (FI)||12.9||7,361||0.40||State Street|
|SPDR KBW Mortgage Finance ETF||KME||Fixed Income (FI)||2.1||4||0.35||State Street|
|SPDR Barclays Capital Aggregate Bond ETF||LAG||Fixed Income (FI)||3.8||230||0.22||State Street|
|SPDR Barclays Capital Long Term Credit Bond ETF||LWC||Fixed Income (FI)||0.0||29||0.15||State Street|
|SPDR Barclays Capital Short Term Corporate Bond ETF||SCPB||Fixed Income (FI)||4.7||341||0.12||State Street|
|SPDR Barclays Capital Long Term Treasury ETF||TLO||Fixed Income (FI)||4.2||28||0.13||State Street|
|Market Vectors Investment Grade Floating Rate Bond ETF||FLTR||Fixed Income (FI)||0.0||5||0.19||Van Eck Global|
|High-Yield Municipal Index ETF||HYD||Fixed Income (FI)||0.0||210||0.35||Van Eck Global|
|Vanguard Intermediate-Term Bond ETF||BIV||Fixed Income (FI)||4.4||11,684||0.11||Vanguard|
|Vanguard Long-Term Bond ETF||BLV||Fixed Income (FI)||5.1||4,027||0.11||Vanguard|
|Vanguard Total Bond Market ETF||BND||Fixed Income (FI)||4.3||88,710||0.11||Vanguard|
|Vanguard Short-Term Bond ETF||BSV||Fixed Income (FI)||3.2||21,469||0.11||Vanguard|
|Vanguard Extended Duration Treasury ETF||EDV||Fixed Income (FI)||4.3||459||0.14||Vanguard|
|Vanguard Intermediate-Term Corporate Bond ETF||VCIT||Fixed Income (FI)||0.0||499||0.15||Vanguard|
|Vanguard Long-Term Corporate Bond ETF||VCLT||Fixed Income (FI)||0.0||103||0.15||Vanguard|
|Vanguard Short-Term Corporate Bond ETF||VCSH||Fixed Income (FI)||0.0||1,653||0.15||Vanguard|
|Vanguard Intermediate-Term Government Bond ETF||VGIT||Fixed Income (FI)||0.0||126||0.15||Vanguard|
|Vanguard Long-Term Government Bond ETF||VGLT||Fixed Income (FI)||0.0||75||0.15||Vanguard|
|Vanguard Short-Term Government Bond ETF||VGSH||Fixed Income (FI)||0.0||142||0.15||Vanguard|
- Income investors can potentially increase returns by up to 300 basis points by switching from mutual funds to ETFs
- ETFs off lower costs, more flexibility and reduced tax bills
- Multiple ways to invest for income with ETFs:
Income investors should also consider REIT ETFs
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