A high yield exchange traded fund (ETF) can feel like a secure investment in uncertain economic time. A "high yield" fund is one that promises high dividend payments. Other funds may focus on alternatives such as capital appreciation. High yield funds will continually payout during the year. Exchange traded funds are portfolios that trade like securities. They represent multiple underlying assets, and they trade at the value of their assets on any given day. Therefore, a high-yield ETF is simply a fund, trading like a security, that focuses on dividends. Finding the right opportunity depends on several factors.

Quality and Security of the ETF

It can be a challenge to measure the quality of any fund, but there are several factors that can provide key insight. The fund's rating is one important factor. Funds are rated by sophisticated financial firms, so this will give you a clear picture of what the experts say about the fund performance. In addition to rating of the ETF as a whole, it is important to take a look at the assets it is holding. How are these rated, and what types of assets are they? Are they assets you would find of high quality if they were purchased alone?

Fund Yield vs. Expense Ratio

The fund's yield is only one factor in its ultimate productivity. You will want to see the expense ratio and annual turnover on the fund to understand how much it will cost you in order to purchase shares. For example, a fund with a very low turnover, say 10%, takes a long time to replace its assets. This means trades occur less frequently, and transaction fees will be lower. If a fund has a very high annual turnover, then trades are occurring constantly. Because of the constant trading the expenses will be high. Even if this fund posts a high yield, much of that yield could be paid out.

Industry Focus

The industry where the fund is concentrated will give insight into its security and potential yield. For example, you may select an Emerging Market Fund, which concentrates investments internationally. If you anticipate an emerging markets boom, this may be a wise investment. Conversely, a fund like the iShares Dow Jones Select Dividend Index is concentrated on the financial markets. During the financial market crash of 2007, this previously high-yield fund underperformed when compared to its market counterparts. 

Equity Income Funds

Some high yield ETFs will provide equity in the form of securities rather than cash in order to pay out a dividend. There are several advantages to this option, including possible tax deferment on the earnings that are reinvested through a capital gains option. Capital appreciation of your assets can be particularly advantageous if you are allocating the investment toward a future purchase, such as a nest egg for a home. These funds cater to moderate and conservative investors, and they are typically concentrated in secure, large business stock. Consider equity income ETFs an alternative to straightforward dividend options.

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