My 3 Favorite High-Yield ETFs For The Long Haul

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Here at StreetAuthority, we talk alot about the appeal of rising dividends, but it's unwise to pursue high yields solely throughstocks . Themarket can gyrate wildly, and a bad quarter for any givenstock can wipe out ayear 's worth ofdividend payments.

As I noted in a recent look at Federal Reserve policy,fixed-income investors must continue to look beyond the traditional offerings from the U.S. government (bonds , bills, etc.) and banks (CDs ) and seek out otherinvestments thatoffer up more solidincome payments.

That's why you need to keep tracking opportunities among bonds as well. Where some investors seek out the safety (and comparatively low yields) of investment-gradecorporate bonds , and others prefer riskier but higher-yielding junk bonds, there is a middle ground.

Fixed-income exchange-tradedfunds ( ETFs ) offer decent yields and are comparatively safe because they own a basket of bonds, making them less vulnerable to a default by any one particularissue .

Another benefit of ETFs: There are now so many of them that you can choose from a wide range of options when building out your portfolio. 

Here are three fixed-income ETFs that hold great long-term appeal.

1. PowerShares SeniorLoan PortfolioETF ( BKLN )
These days, even junk bonds (also known ashigh-yield bonds ) have become quite popular with risk-averse investors. As a result, their rising prices have pushedjunk bond yields down into the 5% to 6% range. Yet these bonds carry considerable risk. If any particularbond issuer defaults, only 44% of the assets end up being recovered, according to Morningstar.

That makes this ETF comparatively more appealing: Because it holds seniorsecured debt of these high-yielders, itwill suffer less if there are defaults. Roughly 65% of assets secured by seniordebt are recovered inbankruptcy proceedings.

And investors can still get solid yields. This ETF distributed $1.20 a share in 2012 and is on pace to maintain that payout this year, equating to a 4.8%yield .

An added benefit: The bonds in this portfolio are "floating rate," which means their payouts would rise in tandem with eventually rising interest rates. That means the value of the bonds will also remain constant as rates rise, unlike many bonds that lose value as rates move higher.

2. Vanguard Long-Term Corp BondIndex ETF (Nasdaq: VCLT)
If you are an active ETF investor, then you should always see what Vanguard has to offer. Vanguard focuses on lowtransaction costs , so the expense ratios among the ETFs are often the lowest in the segment. Just as important, Vanguard's risk-averse corporate culture means that the holdings in any portfolio have been vetted to ensure they aren't too risky.

And that sums up the appeal of this ETF. It has anexpense ratio of just 0.12% and typically pays out roughly $4 a share in dividends every year, good for a 4.5% yield. The striking aspect of that yield is that thisfund focuses on investment-grade bonds (rated BBB or higher) issued by companies such as General Electric ( GE ) and Wal-Mart ( WMT ) . Many investment-grade bonds issued in recentquarters carry interest rates closer to 3%.

3.SPDR BarclaysCapital Emerging Markets Local Bond ETF ( EBND )
When investors think about emerging markets, they think about volatile economies that can create havoc for leading regional companies. Yet there's no reason to take on corporate risk in these markets whengovernment bonds , which are far less likely to default, already offer solid yields.

This ETF is loaded with government bonds from Mexico, South Korea, Brazil, Poland and elsewhere. The average bond sports a 4.5% yield. Compare that with U.S. government bonds, which typically yield less than 2%.

Note that this ETF owns these bonds in the localcurrency , so an upward move in the U.S dollar would eat intogains (conversely, a drop in the dollar would aid this fund's returns). Still, thecurrency risk is something you should always look into when seeking international exposure.

Risks to Consider: Bonds aren't risk-free, just much less risky than stocks. But they can fall in value in an era of slowing economic growth or rising interest rates.

Action to Take --> These funds don't offer the best yields around. Instead, they offer respectable yields while taking on less risk than junk bonds. Each of these three ETFs offers a different approach to this niche, and they can be owned as a group.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: BKLN , EBND , GE , WMT

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