Turn To ETFs For Income

11/17/2014


Fund investors facing tiny yields need not despair. Below we list 12 exchange-traded funds (ETFs) worthy of a spot in most income-oriented portfolios.

One way to find income plays is to simply compare yields. A better way is to factor in expenses, relative performance, and our proprietary fund scores.

To that end, we identified top income plays spanning 12 core categories. All 12 ETFs pay dividends quarterly or monthly and yield at least 1%, with an average of 2.6%. All 12 are solid core holdings, partly reflecting very low expense ratios, which average a minuscule 0.19%.

INCOME GENERATORS AMONG ETFs
The ETFs below represent attractive income picks in 12 core categories, reflecting above-average fund scores, modest expenses, and solid relative performance.
ETF (Price; Ticker)
Est.
Yield
(%)
YTD
Total
Return
(%)
Exp.
Ratio
(%)
Fund
Score
Category
Guggenheim S&P 500 Utilities
($77; RYU)
3.0
25.5
0.40
91
Utilities
iShares 1-3 Year Credit ($105; CSJ)
1.0
0.5
0.20
69
Shrt.-trm.
bonds
iShares Growth Allocation ($40; AOR)
2.0
6.1
0.30
65
Balanced
iShares Russell Mid-Cap ($165; IWR)
1.4
11.2
0.20
96
Midcap
PowerShares Nat'l AMT-Free Muni.
($25; PZA)
4.0
13.6
0.28
85
Tax-free
bonds
Vanguard FTSE Developed Mkts.
($39; VEA)
3.5
(2.9)
0.09
86
Foreign
stocks
Vanguard High Dividend Yield
($69; VYM)
2.8
13.1
0.10
95
Large-cap
Vanguard Inter.-Term ($85; BIV)
2.9
6.2
0.10
82
Interm.
bonds
Vanguard REIT ($79; VNQ)
3.2
25.9
0.10
98
Real estate
Vanguard Total Bond Mkt. ($82; BND)
2.6
4.9
0.08
64
U.S.
bond mkt.
Vanguard Total Stock Mkt.
($105; VTI)
1.7
11.1
0.05
91
U.S.
stock mkt.
WisdomTree SmallCap Dividend
($71; DES)
2.7
6.1
0.38
86
Small-cap

In our fund-rating system, where nine of the funds rank among the top one-fifth of their category, the 12 ETFs sport an average score of 84. Ranks are computed each month by evaluating expense ratios, tax efficiency, risk-adjusted performance, and total returns for various periods up to five years. Three standout ETFs are profiled below.

iShares 1-3 Year Credit ($105; CSJ) primarily holds high-quality corporate bonds (71% of assets) and government bonds (25%). With a yield of 1% and modest expense ratio of 0.20%, the fund is a solid all-weather pick among conservative, short-term bond funds. Another standout in the category is Vanguard Short-Term Investment-Grade ($80; VCSH), which is used for the recommended cash position on our buy lists. The Vanguard ETF, which lacks a five-year track record and is not scored in our rating system, is a top pick.


Vanguard High Dividend Yield ($69; VYM) offers a compelling combination of a high fund score (95), generous yield (2.8%), and rock-bottom expenses (0.10%). The fund, which holds 392 stocks, has sizable exposure to technology (18% of assets), consumer staples (13%), and financials (12%). On Sept. 30, the market capitalization of the average stock in the portfolio was $90 billion — squarely in the large-cap camp. The fund has risen 13.1% this year.


iShares Russell Mid-Cap ($165; IWR) holds 844 stocks and is tilted toward financial (22% of assets) and consumer-discretionary (18%) stocks. A three-year annualized return of 20.5% ranks near the top one-quarter of its category. Up 11.2% so far this year, the ETF earns a fund score of 96 and yields 1.4%.

OUR RECOMMENDED MUTUAL FUNDS
If you want to mimic our recommended Growth or Conservative Portfolios, purchase the funds listed below in the proportion suggested by the target weights.
Year-To-Date *
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating †
Artisan International ($31; ARTIX)
0.6
B
9
9
85
Baird Core Plus Bond ($12; BCOSX)
5.5
B
6
0
94
Dreyfus Midcap Index ($40; PESPX)
7.8
B
0
0
49
Dreyfus Small Cap Stock Index
($31; DISSX)
3.2
C
0
0
83
Homestead Small Company
($38; HSCSX)
3.7
B
5
8
98
iShares MSCI EAFE Small-Cap ETF
($47; SCZ)
(5.2)
E
7
8
94
T. Rowe Price Divers. Small-Cap Growth
($26; PRDSX)
4.6
A
9
9
100
T. Rowe Price Value
($38; TRVLX)
11.3
A
10
11
84
Thompson Bond ($12; THOPX)
2.4
A
6
0
86
Vanguard 500 Index ($189; VFINX)
12.1
A
7
8
85
Vanguard Dividend Growth
($23; VDIGX)
10.4
C
10
10
80
Vanguard GNMA ($11; VFIIX)
5.7
A
0
0
95
Vanguard Growth Index
($53; VIGRX)
12.2
A
11
11
91
Vanguard High-Yield Corp. ($6; VWEHX)
5.5
A
5
6
84
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
6.3
B
0
0
92
Vanguard Selected Value
($30; VASVX)
5.4
E
7
10
85
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
1.8
B
0
0
99
Vanguard Total Bond Mkt. Index
($11; VBMFX)
4.8
C
0
0
48
Vanguard Wellesley Income
($26; VWINX)
7.2
A
0
0
99
Vanguard Wellington ($41; VWELX)
8.9
A
8
10
99

* Year-to-date ranks through Nov. 11 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%.
Fund ratings are percentile ranks based on our fund-rating system.


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