The top five ETFs for income
Exchange traded funds (ETFs) have only been around for three decades, but they have proved hugely popular, combining flexibility and low cost. Here, Rupert Hargreaves picks the five highest-yielding ETFs on the market now.
Even though exchange traded funds (ETFs) have only been around for three decades, assets in ETFs are expected to reach $14trn by the end of 2024, doubling from $7trn in 2020.
The growth of this asset class has surpassed all expectations over the past ten years. One of the reasons ETFs have been so popular, and are likely to remain popular, is their flexibility.
ETFs provide flexibility other structures do not
This subject can be a bit complex, so I will try and keep it as simple as possible. There are really two different categories of investment funds: open-end investment funds and closed-end funds.
Open-end funds (sometimes called Oeics, or open-ended investment companies) take money from new investors, invest this cash in the portfolio and then issue new shares in the fund to the new investor (shares are bought back when investors exit). This structure means it is difficult to hold less liquid instruments such as bonds and small-cap shares as it might be harder to acquire these assets in the quantities required to satisfy investor contributions and deposits.
Meanwhile, closed-end funds have a limited number of shares in issue (although they can issue more). As such, managers always know how much capital they have available to invest, and can deploy it accordingly.
A quirk of this structure is that closed-end funds can trade at a discount to their underlying net asset value if more investors are selling rather than buying (or at a premium if the situation is reversed). That can’t happen with open-end funds as these investors will have their shares bought back.
Investment trusts are a good example of closed-end funds, while Lindsell Train Global Equity is a great example of an open-end investment vehicle.
ETFs bridge the best of both worlds. They have a fixed number of shares in issue, but can issue and buy back stock if needed at any point.
What’s more, unlike most Oeics and unit trusts, shares can be bought and sold at any point in the trading day. This means it is easier for investors to convert their assets to cash. It can take several days to exit open-ended funds.
Low costs means more money for investors
A handful of providers dominates the ETF market, which gives the asset class another advantage over traditional funds. Most ETFs track market indices, meaning costs are quite low to begin with. However, the economies of scale in the industry have pushed costs down even further.
Still, a disadvantage of using these vehicles is the fact that as most are designed to just track indexes – they won't outperform.
So there are benefits and drawbacks to using ETFs to invest. Some investors might prefer the strategy, while others might want to avoid it altogether.
For those investors who think ETFs offer something different, here are the five highest-yielding income ETFs on the market today.
Ongoing charge (%)
SPDR S&P UK Dividend Aristocrats UCITS ETF
iShares UK Dividend UCITS ETF GBP
WisdomTree UK Equity Income UCITS ETF
FTSE All-World High Dividend Yield UCITS ETF
Fidelity Global Quality Income ETF Inc
All of the ETFs listed above are designed to track an equity income index. I should also note that the yield figures above are a trailing 12-month historical basis. Therefore, they may not be reliable indicators of future income.