While each of these ETF offers compelling income potential, investors should carefully assess their … More
The Federal Reserve held its key interest rate steady, as it continues to parse the effect of U.S. President Donald Trump’s policies on the economy. The S&P 500 saw gains after Fed Chairman Jerome Powell minimized the inflationary effects of Trump’s tariffs as “transitory,” but the index is still down 6% from its February all-time highs. Despite the market upheavals, income-focused investors continue to maintain a sense of stability, as the volatility has not yet reached levels that would significantly upset the dividend cart. The Fed signaling the possibility of a 0.5% rate cut this year somewhat dims the charm of government securities, boosting the appeal of dividend-paying investments. This article explores a few ETFs that provide exposure to alternative asset classes and generate income with attractive yields – offering potential opportunities for income-focused investors in 2025.
Why Invest In High-Yield Dividend ETFs?
People invest in high-yield dividend ETFs for obvious reasons, like generating higher income, and to cushion against price stagnation or losses in the underlying securities.
To Generate Better-Than-Average Income
The S&P 500 currently offers an average dividend yield of 1.2%, while the S&P 500 High Dividend ETF (SPYD), which focuses on the top 80 high dividend-yielding companies within the S&P 500, has a TTM dividend yield of 4.1%. A $1 million investment in the S&P 500 now would yield $12,000 a year, while the same investment in SPYD would return more than $40,000 a year. (Note: This is a simple example and capital appreciation is not taken into account here.)
To Protect Or Enhance Overall Returns
High yields help offset price stagnation/losses in the underlying securities and improve overall returns. Assuming you invest $10,000 for a yield of 5%, meaning the investment of $10,000 in a dividend ETF gives you $500 in annual income. Even if the price of the ETF falls by 5% over the year, the dividend offsets the loss – protecting your total investment. (Note: This is a simplified example and does not account for any ETF management fees or other costs.)
Are High-Yield Dividend ETFs Safe Investments?
Does that mean high-yield dividend ETFs are safe for retirees? Not necessarily. While high-yield dividend ETFs provide attractive income opportunities, the sustainability of the dividends is based on factors including the asset class the ETF invests in, and the strategy deployed by the ETF to generate income. High-yield dividend ETFs can also be susceptible to macroeconomic headwinds, interest rates and sector-specific risks. Diversification remains key, especially when relying on investments for retirement income. A good quality, high-yield dividend ETF should be a good fit into a portfolio where a solid level of diversification has already been achieved. While selecting a dividend-paying ETF, high-yield should not be the lone criteria. Consistency of dividend payments, and the expense ratio of the ETF (the lower the better) should be taken into consideration. Typically, high-yielding funds do not invest in high-growth securities, thereby limiting upside potential.
Methodology Used For These ETF Picks
The ETFs selected meet the following criteria:
- Attractive dividend yields of at least 7% outpacing the SPYD’s TTM yield of 4.1%.
- Departing from a traditional stock-focused dividend strategy, these ETFs focus on niche sectors or deploy alternative income-generating strategies, to enhance diversification and yield potential.
3 High-Yield Dividend ETF Picks
1. iShares 20+ Year Treasury Bond Buywrite Strategy ETF (TLTW)
Fund Overview
TLTW is a good fit for investors seeking high dividend yields and not too perturbed by the volatility that comes with the U.S. Treasury bonds. The ETF also serves as a potential hedge for equity-heavy portfolios and adopts a buy-write investment strategy or “covered call” – which means owning a security and selling a call option on that security. By selling the call option, the seller agrees to sell the underlying asset at a predetermined price, called the strike price, if the buyer of the call option decides to exercise it. The seller collects a premium for selling the call option. If the price of the underlying asset rises above the strike price before the option expires, the buyer may choose to exercise the option, and the seller must sell the asset at the strike price, even if the market price is higher. Selling call options generates income from the premium, but it can limit the upside to potential gains if the underlying asset’s price increases significantly
TLTW seeks to mirror the performance of the Cboe TLT 2% OTM BuyWrite Index. It achieves this by holding shares of the iShares 20+ Year Treasury Bond ETF (TLT) and selling one-month covered call options that are 2% out-of-the-money on those shares. This means the fund is selling the right to any upside greater than 2% above current price. This creates a modest upside potential and the call options are “covered” by TLTW’s long position in TLT, effectively offsetting the risk.
Why The TLTW ETF Is A Top Choice
The fund manages $1.13 billion in assets, has an expense ratio of 0.35%, and offers a 12.95% dividend yield (as of March 21). TLTW receives dividends from TLT while generating premium income through the sale of the call options. The underlying assets in TLTW are long-term U.S. Treasury bonds, making the ETF a relatively low-risk investment. However, interest rate fluctuations can introduce volatility in the ETF.
Two primary catalysts can drive TLTW’s forward potential:
- The anticipated rate cuts in 2025, positioning the fund to benefit from a more favorable lower-interest-rate environment. TLTW has returned a negative 9.6% (as of Feb 28, 2025) since its inception in August 2022 – a period marked by rising interest rates. Between March 2022 and July 2023, the Fed hiked benchmark interest rates 11 times. In the year-to-date period (as of Feb 28, 2025), TLTW has returned 4.5%
- In times of market turbulence, long-term Treasuries are often sought after as a safe-haven investment. In this scenario, TLTW will benefit but the upside will be capped because of the covered call strategy. The attractive yield should somewhat compensate for the limited upside.
2. Virtus Private Credit ETF (VPC)
Fund Overview
Virtus Private Credit ETF (VPC) offers investors an opportunity to access the private credit market, through its diversified portfolio of small and middle market lenders. The private credit market valued at approximately $1.7 trillion by the U.S. Federal Reserve, involves loans made directly to companies, often by non-bank financial institutions, such as business development companies (BDCs) and closed-end funds (CEFs). These loans typically offer higher yields than public corporate bonds, making them an attractive choice for income-seeking investors. BDCs are required to pay out a majority of their taxable income as dividends – the reason why BDCs often have dividend yields that are well above the yields of other dividend-paying common stocks, the interest rates of Treasury notes and bonds, or other income-oriented financial instruments. VPC tracks the Indxx Private Credit Index, which offers exposure to a diversified portfolio of BDCs and CEFs.
Why The VPC ETF IS A Top Choice
Despite the high yields, investing in private credit is not for everyone as it spans a complex and illiquid process. But, VPC provides a straightforward, liquid option to invest in private credit through an ETF structure. Shares of VPC can be bought and sold intraday, providing investors with easy access to this alternative asset class without locking up their capital in illiquid private funds. VPC also provides less sensitivity to interest rates than traditional bond strategies.
VPC’s expense ratio of 9.86% looks intimidating. However, 9.11% of these are indirect expenses that stem from acquired fund fees and expenses (AFFE). This is because VPC is structured as a fund-of-funds, with its primary holdings consisting of BDCs and CEFs, both of which are funds that charge their own management fees. This is why the ETF incurs a high AFFE. The good news is AFFE is not directly deducted from the fund’s assets, but still should be itemized in the overall expense ratio for reporting transparency. When excluding these indirect costs, the fund’s direct expense ratio is a more modest 0.75%, which is still high but somewhat alleviated by the fund’s solid total returns of more than 150% in the last 5 years, and a juicy TTM yield of 11% even after these expenses.
The key catalyst for VPC is the accelerating growth of the private credit market in recent years to $1.7 trillion, outpacing even the $1.4 trillion leveraged loan and $1.3 trillion high-yield bond markets. Private credit has other advantages like a higher recovery potential vs. traditional bonds in the event of a default. It is also less volatile than public debt markets, thereby sporting a lower risk profile. Investors get an added layer of protection, because private credit issuers, including BDCs and CEFs, are generally subject to federal regulations.
3. Alerian MLP ETF (AMLP)
Fund Overview
AMLP tracks the performance of the Alerian MLP Infrastructure Index, which includes prominent energy infrastructure Master Limited Partnerships (MLPs) that earn the majority of their cash flow from midstream activities. MLPs build, own and operate energy infrastructure assets such as pipelines, storage facilities and processing plants, thereby providing exposure to long-lived real assets that generate inflation-protected cash flows. MLPs have the potential to distribute more of their cash flow to investors because they pay no taxes, unlike a corporation.
Why AMLP ETF Is A Top Choice
Alerian MLP ETF is more than 50% invested in the pipeline sector and can benefit from broader trends in energy policy that support energy infrastructure development. By connecting supply to demand globally and domestically, energy infrastructure MLPs will continue to play a key role in the impressive growth of fuel production, be it oil/natural gas or cleaner future fuels.
AMLP also simplifies the tax process for investors by issuing a standard 1099 form, avoiding the tax filing complexities associated with a K-1 form that comes with owning individual MLPs directly. AMLP is also eligible for tax-advantaged accounts like the IRA and 401K and does not generate Unrelated Business Taxable Income (UBTI) for investors. UBTI is income generated by a tax-exempt organization from activities that are not related to its exempt purpose.
AMLP has continuous liquidity and no leverage. The ETF’s qualified dividends are taxed at capital gains tax rates, which are lower than income tax rates for some taxpayers. In fact, single filers with a taxable income of less than $48,475, and joint-married filers with a taxable income of less than $96,950, pay no taxes on AMLP’s qualified dividends.
A key catalyst for AMLP will be the Trump administration’s energy-friendly approach. The midstream sector appears well positioned to benefit from the proposed expansion of U.S. oil and gas output, resumption of gas exports, plans to replenish the Strategic Petroleum Reserve (SPR) and relaxed regulations.
Bottom Line
The TLTW, VPC, and AMLP ETFs each present distinct opportunities for income-focused investors. TLTW offers exposure to long-term U.S. Treasuries with an income-enhancing covered call strategy, providing a reliable yield while capping potential upside. VPC gives investors access to the private credit market, offering attractive yields with relatively lower sensitivity to interest rate fluctuations, though it comes with a complex expense ratio. AMLP targets energy infrastructure MLPs, providing inflation-protected cash flows and tax advantages, making it a strong option for those seeking consistent income. While each ETF offers compelling income potential, investors should carefully assess their individual financial goals, risk tolerance and the specific risks associated with each strategy before making an informed investment decision.
Please note that I am not a registered investment advisor and readers should do their own due diligence before investing in the ETFs/stocks mentioned in the article, or any other ETF/stock. I am not responsible for the investment decisions made by individuals after reading this article. Readers are asked not to rely on the opinions and analysis expressed in the article and encouraged to do their own research before investing.
