Rock bottom interest rates are forcing the yield-starved
investors to look for alternate sources of income. Many of them
have poured money in dividend
and while we believe in the long-term value of the dividend ETFs,
their attraction will diminish slightly if the tax laws change
next year. Additionally some of them now look expensive on
Many other investors have flocked to riskier assets in search
of higher yields, including high yield bonds, preferred stocks or
high dividend ETFs--which invest in companies with not so strong
In order to take advantage of the growing demand for yield,
many very innovative products have also been launched recently
but some of those are very risky. (Read:
Three Biggest Mistakes of ETF Investing
So finding a combination of decent income, low-risk and solid
growth potential seems to be a difficult task for investors.
Thankfully there are some ETFs products available which
possess this ideal combination.
Below we have analyzed three ETFs which have exhibited
relatively low volatility in the past, have solid growth
potential and yield more than 4%. Additionally these ETFs provide
great diversification benefits to the portfolio.
PowerShares Emerging Markets Sovereign Debt
PCY is based on the DB Emerging Market USD Liquid Balanced
Index, which tracks the potential returns of a theoretical
portfolio of liquid emerging markets U.S. dollar-denominated
government bonds issued by 22 emerging-market
Emerging Markets Sovereign Bond ETFs-Safe with
The case of investing in emerging markets' sovereign debt
seems to be pretty strong now. Many emerging countries now have
better fiscal health and lower debt levels than their developed
counterparts. Further these countries are growing at a much
higher rate compared to the developed world and have low
correlations with developed economies.
Further, while interest rates are at rock-bottom levels in the
U.S., the emerging countries' central banks still have the
flexibility to cut rates further, providing great chances for
Launched in November 2007, the product has already attracted
more than $2.8 billion in assets. It charges the investors 50
basis points in annual expenses and currently pays out a yield of
The fund has returned 18.9% year-to-date and 43.0% over a
three-year period. It has exhibited a low annualized
volatility of 5.3% (based on daily price returns over one year
Guggenheim Multi-Asset Income ETF (
CVY follows the Zacks Multi-Asset Income Index, which is
comprised of approximately 125 to 150 securities selected using a
proprietary methodology, from a universe of domestic stocks,
ADRs, REITs, MLPs, CEFs and preferred stocks. The objective
of the Index is to select a diversified group of securities with
the potential to outperform, on a risk adjusted basis, the Dow
Jones U.S. Select Dividend Index.
In terms of asset-class breakdown, the ETF is tilted towards
common stocks (57.4%), while ADRs and MLPs (10.1% each) occupy
the next two spots. (Read:
4 Low-Volatility ETFs to Hedge Your Portfolio
By investing in diverse asset classes, which have low
correlations, this ETF actually reduce volatility and provide
stability to the portfolio. Diversified portfolios in general
deliver superior risk-adjusted returns over the longer-term.
The fund has had a very impressive gain of 53.8% over three
years while it has returned a decent 12.8% year-to-date.
Additionally its annualized standard deviation was 11.7% compared
with 12.6% for the S&P 500 index.
It charges an expense ratio of 60 basis points per year and
currently has a 12 month yield of 5.1%.
JPMorgan Alerian MLP Index ETN (
AMJ is the most popular MLP ETN in the MLP space with over
$5.2 billion in assets under management and daily volume over 1.2
million shares a day. The ETN which seeks to track the Alerian
MLP Index was launched in April 2009.
The note charges the investors 85 basis points a year in fees
for its services but rewards the investor with a very attractive
In addition to high yield and the potential for capital
appreciation, MLPs also have lower volatility and provide
diversification benefits to the portfolio. Further MLPs in
general are less risky than other plays in the broader energy
space. We may however add that MLPs are a complicated asset class
and the investors should understand the tax related and other
issues before investing. (Read:
How to Play the MLP ETF Space
While the fund has returned 8.2% year-to-date, its performance
has been much better in the longer term, with a return of 83.8%
over three years, almost double of SPY return of 43.0% over three
years. The product also exhibited slightly lower volatility
compared with the broader market with an annualized standard
deviation of 12.3% compared with 12.6% for the S&P 500
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JPM-ALERN MLP (AMJ): ETF Research Reports
GUGG-MULTI-ASST (CVY): ETF Research Reports
PWRSH-EM SVN DP (PCY): ETF Research Reports
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