Funds: How to find income without the risk
A spate of new exchange-traded funds (ETFs) has been launched to take advantage of investors' search for yield. Paul Amery looks at how these funds stack up.

By keeping interest rates near zero, central banks across the West are forcing anyone who wants to make a real (after inflation) return on their savings to look beyond the safety of a bank account. A spate of new exchange-traded funds (ETFs) has been launched to take advantage of this quest for yield. These include ETFs tracking high-yield (junk) debt, emerging-market local currency bonds, and emerging-market stocks with high dividend yields. But while some may be worth a punt in the short term, anyone looking for income over the longer run should steer clear.
The trouble is, as soon as you venture beyond a bank account (and we know that even banks are not 100% secure), you are taking a significant risk with your capital. If you buy longer-maturity bonds in the hope of picking up yield, you risk losing capital when interest rates start to rise (rising rates would force bond yields higher, and prices down). Junk bonds may offer high yields, but you risk not getting your money back at all if the issuer goes bust. As for high-yielding stocks they may look good now, but in troubled times, dividends can quickly be slashed, as happened with the banks in 2008.
A better bet is to follow the advice of M&G's Global Dividend fund manager, Stuart Rhodes: don't be tempted by high headline yields focus on sensibly run, developed-world companies that have a decent history of paying and raising dividends, and which offer hope of rising yields in future.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Following this approach would mean that, among the Stoxx Europe 600 supersectors, for example, you would ignore higher-income telecoms and utilities, whose dividends are pretty static, as well as financials, whose payouts are under pressure. Instead, you would focus on sectors such as oil and gas, healthcare, personal and household goods, and food and beverages.
A range of ETFs from different European providers track these indices. For example, db x-trackers lists all its sector funds on the London Stock Exchange. In the US, consider fund provider Source's consumer staples, consumer discretionary, and healthcare ETFs.
We'd also look at Asian small-caps they combine reasonable valuations with a decent current income and possible future growth. iShares offers ETFs tracking the MSCI Far-East ex-Japan and MSCI Japan small cap indices, with yields around 2%.
Paul Amery edits www.indexuniverse.eu .
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Paul is a multi-award-winning journalist, currently an editor at New Money Review. He has contributed an array of money titles such as MoneyWeek, Financial Times, Financial News, The Times, Investment and Thomson Reuters. Paul is certified in investment management by CFA UK and he can speak more than five languages including English, French, Russian and Ukrainian. On MoneyWeek, Paul writes about funds such as ETFs and the stock market.
-
8 of the best houses for sale with home cinemas
Houses for sale with home cinemas – from a modern oast-house style property in Kent to a house in Buckinghamshire with Dolby sound and bespoke seating
By Natasha Langan Published
-
Rachel Reeves faces £23 billion capital gains tax “black hole” – will she be forced to look elsewhere?
The fiscal watchdog has downgraded its forecast for capital gains tax revenues, leaving chancellor Rachel Reeves with £23 billion less than previously expected
By Katie Williams Published