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.

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Paul Amery

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.