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Investing for Income with ETFs

Investment case

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.

Overview

Income investors looking to generate cash flow with ETFs can choose from fixed income, dividend and international funds.

Fixed Income

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%.

Dividends

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.

International

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.

 

Top Performers

Largest

1. Lehman 1-3 Year Treasury Bond Fun (SHY) - $9.0 billion

2. Lehman TIPS Bond Fund (TIP) - $6.9 billion

Lowest Cost

1. Vanguard High Dividend Yield ETF (VV) - 0.07%

2. Vanguard Short-Term Bond ETF (BSV) - 0.11%

Highest Yield

1. SPDR Lehman High Yield Bond ETF (JNK) - 9.8%

2. S&P U.S. Preferred Stock Index Fund (PFF) - 7.35%

 

ETFs to show per page:
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

Executive Summary:

  • 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:

Fixed Income: SHY, BND, JNK

Dividends: DVY, PFF

International: BWX, DLS

Income investors should also consider REIT ETFs



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