If I know anything about you guys, you like yield more than I like dirty pee porn. I mean, uh, more than my friend Smelson likes pee porn. Let’s never speak of this again.
There are a lot of people who want to invest in high yielding stuff, but don’t bother because they think the whole sector is risky. These investments are like Tim Tebow on a baseball diamond. Something’s not right here. We gotta go see what’s up.
(whispers) Wait. HE’S DOING WHAT?!?!?
He’s not losing his virginity, that’s for sure. Hey-o!
Italics man is going to throw tomatoes at me, isn’t he? If he was real, anyway.
ETFs are the solution to this. They offer instant diversification while only charging comparatively little in return. And some of them offer access to some very, uh, interesting asset classes. You’ll see.
Let’s take a closer look at some of Canada’s best dividend ETFs, ranked by their trailing twelve month yield. I’ll then do a little analysis of each product for y’all.
The best dividend ETFs table
Here they are, ranked by yield.
|First Asset Materials Covered Call ETF (TSX:MXF)||10.05%|
|First Asset U.S. & Canada Lifeco Income Fund (TSX:FLI)||5.96%|
|Horizons Active High Yield Bond ETF (TSX:HYI)||5.72%|
|Horizons Enhanced Income U.S. Equity (USD) (TSX:HEA.U)||5.71%|
|BMO U.S. Dividend Covered Call ETF (TSX:ZWH)||5.71%|
|iShares U.S. High Yield Bond Index ETF (TSX:XHY)||5.58%|
|First Asset Active Credit ETF (TSX:FAO)||5.57%|
|BMO Equal Weight REITs Index ETF (TSX:ZRE)||5.45%|
|First Asset Canadian REIT Income Fund (TSX:RIT)||5.30%|
|iShares Diversified Monthly Income Fund (TSX:XTR)||5.25%|
The good news is a lot of these dividend ETFs are somewhat similar. That’ll make our analysis easier.
Let’s start with the oddest one of all, the First Asset Materials Covered Call ETF. This bad boy holds a bunch of gold and mining stocks and then writes covered calls against them (I went over covered calls here if you’re not sure what they are). It really did pay out a 10% distribution in 2016, but that might be an anomaly. The distribution was $1.62 per share in 2016, versus $0.61 in 2015 and $0.46 in 2014.
Keep in mind this fund is tiny. It has 406,666 units outstanding for a total market cap of $7.6 million. And it has a 0.65% management fee if you care about such things.
Next up is the First Asset U.S. and Canada Lifeco Income Fund, which has just 10 holdings. They’re all insurance companies, as you’d expect. It also sells covered calls to generate additional income. We’ll group the Horizons Enhanced Income U.S. Equity ETF and BMO U.S. Dividend Covered Call ETF under the same category. They all do basically the same thing and have about the same yield. They are the Generic Debt Bloggers of the ETF world.
Next we’ll look at junk bond ETFs, which include Horizons Active High Yield Bond ETF, iShares U.S. High Yield Bond ETF, and First Asset Active Credit ETF. Both the Horizons and First Asset funds are actively managed with fewer holdings than the iShares version. They all hold the same types of assets, just in slightly different ways. The Horizons fund has the highest yield (5.72%) with the lowest management fee (0.65%). I’d probably go with it.
Then we’ve got two REIT ETFs, the BMO Equal Weights REIT Index and the First Asset Canadian REIT Income Fund. There really isn’t much difference between the two. I’d go for the BMO one just because the MER is about 15 basis points less.
And finally, we’ve got the iShares Diversified Monthly Income Fund, which holds a bunch of underlying ETFs. It’s got some equity, some bonds, some high yield debt, and even some preferred shares. It’s basically a balanced fund with a MER of 0.60%.
I should note that each of these funds charges between 0.6% and 0.8% a year in fees. They’re cheap versus mutual funds, but relatively expensive compared to TSX Composite or S&P 500 ETFs.
Which would Nelly buy?
I’m a big fan of junk bonds, but I’d probably get a little friskier and buy a levered junk bond closed end fund. I’m paying a higher management fee, but those closed end funds use their own debt to get better returns. It works out well if you ignore the price.
Some of the biggest leverage junk bond ETFs are:
- Pimco High Income Fund (NYSE:PHK)(12.16% yield)
- Calamos Convertible and Hi Income Fund (NASDAQ:CHY)(10.8% yield)
- DoubleLine Income Solutions Fund (NYSE:DSL)(9.2% yield)
- Dreyfus High Yield Strategies Fund (NYSE:DHF)(9.3% yield)
(Reminder: I own NYSE:DHF)
The last three trade close to the value of their underlying assets, but the PIMCO fund regularly trades at a 50% premium to net asset value. Paying $1.50 for $1 is not my idea of a good time. I’d avoid that one.
I’m not really a fan of the covered call ETFs, either. Remember, the big knock against covered calls is you lose a lot of upside potential in exchange for getting paid today. I like getting paid today, but not if I’m going to end up with less money in the long run.
Buying a REIT ETF is fine, but I’m a bigger fan of picking my own that yield more and buying them individually.
That leaves us with the last choice, the iShares ETF that owns a bunch of other underlying assets. I probably wouldn’t own it, but I can certainly see the thought process behind it, especially if you were looking for a good dividend ETF.
This is the end
If I was looking for a high dividend ETF, I’d be more inclined to choose the iShares Diversified Monthly Income Fund over the others. It’s got lots of diversification coupled with a decent management fee. Oh, and it pays monthly, too, which is perfect for the retirees. I’d probably avoid the rest on this list, but you might find one that works for you.