Investors tend to think about appreciation when they think ETF funds. And that make sense: The first ETF in the United States tracked the S&P 500, a straight stock investment.
Today that fund, the SPDR S&P 500 ETF Trust (SPY), is a monster at $140 billion in assets under management. The next runner up, Vanguard Total Stock Market ETF (VTI), is at $127 billion. From there, net assets among ETF funds drops off to less than $50 billion each, down the list.
We get it. People want to time the market. But they should also think of ETFs when they think of income. Yes, there are some wacky yields out there, funds which purport to track fast-moving Korean equities or Brazilian currency movements.
But we’re talking about much more pedestrian, and predictable, products. For instance, Vanguard Total Bond Market ETF (BND) currently yields 2.47%. The SPDR Dow Jones REIT (RWR), which follows real estate investment trusts, pays 3.17%.
A little further up the risk curve we find Vanguard FTSE Emerging Markets ETF (VWO), paying 3.36%. Even SPY pays 2.02%.
If your taste for risk is sufficient, you can put some of your investment portfolio into high-yield debt. The SPDR Barclays High Yield Bond (JNK) is paying 6.38% right now.
Yes, junk bonds. No, not half your portfolio. But if you are used to buying debt for the short-term bump in yield and are willing to rebalance over time, a smidgen of “junk” can bring up your total portfolio income level.
Why use ETFs to do this? Well, because they are cheap and simple. For instance, there are quite a few real estate investment trusts out there, dozens of them. They invest in healthcare facilities, malls, apartment complexes — you name it.
Which is best? It doesn’t matter if you use ETF funds to own them all. The market will, in time, sort out winners from losers. That’s what markets do.
You need only concern yourself with having at least one foot in the game. While you’re there, you might as well enjoy the income flow these kinds of investments bring.
Income-oriented plays generate cash for you to reinvest. Some of your return will come from selling positions in a timely fashion, yes, but some will come from yield, what investing professionals call “total return.”
Using ETF funds to achieve this is nothing more than diversification in practice. That you get a bump of income to use or invest alongside, well, that’s just smart.