Income ETF

For investors interested in deriving a steady cash flow from their investments, income exchange traded funds (ETFs) are often a better choice than mutual funds. Income ETFs are highly trade-able and usually feature a lower expense ratio than comparable mutual funds; this difference in fees can add up to significant savings over the life of the investment. Additionally, mutual funds are subject to capital gains distribution tax; investments in income ETFs largely avoid these additional taxes due to their structure and payout mechanisms. Income ETFs generally are classified as international, dividend, or fixed income although some overlap in these categories does exist. Income ETFs are sometimes referred to as monthly income ETF investments, since many pay out on a monthly basis. Investors can buy into monthly income ETF portfolios to provide a steady stream of income or to fund ongoing investment cash flow needs.

Fixed income ETFs

A fixed income ETF portfolio usually includes corporate securities, international dollar-denominated bonds and Treasury securities to produce a solid, reliable distribution yield. Index funds offer outstanding diversification across the full spectrum of fixed income securities and usually track the overall market trends, making them a good choice for risk-averse investors. Because the returns on these investments are often guaranteed, fixed income ETFs provide a counterbalance to high risk investments in an income ETF portfolio. These funds include:
  • iShares Lehman Aggregate Bond Fund (AGG)
  • iShares Lehman 1-3 Year Credit Bond Fund (CSJ)
  • iShares Lehman Intermediate Credit Bond Fund (CIU)
  • iShares Lehman MBS Fixed-Rate Bond Fund (MBB)
  • iShares S&P National Municipal Bond Fund (MUB)
  • PowerShares Insured National Municipal Bond Portfolio (PZA)
  • Vanguard Short-Term Bond (BSV)
  • SPDR Lehman Short Term Municipal Bond ETF (SHM)

Dividend income ETFs

Most dividend income ETFs are index funds that track major exchange markets including the Dow Jones and Standard & Poor’s; dividend ETFs usually offer higher yields than fixed income ETFs, but with those higher profits comes a higher degree of risk. Dividend income ETFs are useful for investors who want to diversify their holdings and improve their cash flow situation while accepting moderate risk and the potential for better-than-average returns on their investment funds. Major dividend ETFs include:
  • WisdomTree Total Dividend Fund (DTD)
  • SPDR S&P Dividend ETF (SDY)
  • Vanguard High DVD Yield ETF (VYM)
  • iShares DJ Select Dividend (DVY)

International income ETFs

When diversifying an income ETF portfolio, international ETFs should not be overlooked. The underlying securities for these investments are often based on foreign currencies, making them more volatile than other types of income ETFs; however, the potential for profit is also higher with international income ETFs. International real estate investment trust (REIT) ETFs are often an attractive prospect for investors; while not true income ETFs in the classic use of the term, REIT ETFs offer better-than-average risk profiles while providing a good source of investment income. Some of the best known international income ETFs are:
  • Powershares International Corporate Bond Portfolio (PICB)
  • SPDR Barclays Capital International Treasury Bond ETF (BWX)
  • SPDR Barclays Capital International Corporate Bond ETF (IBND)
  • Emerging Markets Sovereign Debt Portfolio (PCY)

Best income ETFs

Finding the best income ETF is a challenging endeavor and varies from one investor to the next. When researching the best income ETF, it’s necessary to consider a number of factors: the risk tolerance of the particular investor, the required monthly or annual income from the investments, and the overall investment portfolio already in place. By performing the necessary market research, investors can select the best income ETF for their unique financial situation.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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