Last week we look a closer look at the 10 best dividend ETFs in Canada. It was filled with covered call ETFs, high-yield bonds, REITs, and one hot little fund which held a little bit of everything, the iShares Diversified Income Fund. That bad boy was sexier than that time I typed 58008 and then flipped my calculator upside down.

Yeah, that’s right. A grade three joke. Go ahead, stop reading. I’m practically daring you at this point.

One thing I noticed about this exercise is the universe of high-yield dividend ETFs up here in Canuckstan is a little lacking. Our ETF market just doesn’t have the weird variety that the U.S.’s does.

So I decided we’d expand the exercise. Here are the 10 best U.S. dividend ETFs.

The best U.S. dividend ETFs table

Like last time, we’re going to stick these bad boys into a table and sort them by yield.

ETF Yield
Etracs Monthly Pay 2x Leveraged Mortgage REIT (NYSE:SMHD) 21.4%
Etracs Monthly Pay 2x Leverage Closed-End Fund (NYSE:CEFL) 19.4%
Infracap MLP ETF (NYSE:AMZA) 18.4%
Etracs 2x Leverage Business Development Company Index (NYSE:BDCL) 15.9%
Etracs 2x Leverage Wells Fargo MLP (Ex-Energy) (NYSE:LMLP) 14.5%
Etracs 2x Leverage U.S. Small-Cap High Dividend ETN (NYSE:SMHD) 13.4%
Etracs 2x Leverage Diversified High Income ETN (NYSE:DVHL) 12.8%
Exchange Traded Concept Trust (NYSE:YYY) 10.1%
U.S. Equity High Volatility Put Write Index Fund (NYSE:HVPW) 9.7%
SPDR Dow Jones International Real Estate ETF (NYSE:RWX) 9.2%

A couple things to mention before we go any further:

  • ETF screeners are 46 different kinds of useless. I would pay at least $3 to use one that doesn’t suck. Thus, this list may not be complete
  • And I omitted a few funds that looked very similar to ones listed here

A lot of these are double-leveraged ETFs, which is good. I only have to explain the concept once and then apply it to all sorts of different asset classes.

These double-leveraged ETFs are all the same. They invest $1 and borrow an additional $1 to put in the fund. If the debt is at 2% and the underlying assets pay 8%, it creates 6% more income on the leveraged side of the equation.

Here’s a simple example. You have $100 that pays you $10 per year. You borrow an additional $100 at 3% and invest it at $10 per year. Which means you’d end up with:

  • $200 invested
  • $20 in income
  • $3 in expenses
  • $17 in profit

And that’s it. You’ve created a 17% return on your original $100 investment. Isn’t leverage fun?

Real estate investors do this all the time. This is how the concept of cash-on-cash return came to be. The problem with cash-on-cash return (or as stock market investors call it, returns on equity) is all you need to do to increase your return on equity is borrow more money. If we increase the amount borrowed to $200 in our original example, you get $24 in profit, or a 24% return on equity.

If you’re doing such a thing to buy a house, and it’s a property you intend on holding for a long time, it’s not so bad. The problem becomes when you use leverage to buy things that track the whims of the stock market. If such an investment would fall by 50%, you’d be more screwed than a teetotaler at a frat party.

The other risk with leveraged income ETFs

There are two reasons why a company would introduce a 2x leverage income ETF. The first is to make money on the ETF itself, obvs. Most of these products have fees flirting with 1%, which are exceptionally high for ETFs.

The other reason is to profit lending the ETF the money, although as far as I can tell this isn’t excessive. The UBS leveraged ETFs are being charged the three-month LIBOR rate, which is just a hair over 1% annually.

Now it’s time to talk about risk. If stock markets all go to hell and this thing loses a whole bunch of money, the creditor will always get paid first. So, in theory, if any of these leveraged ETFs fall 50%, the issuer could just wrap them up, pay off the creditor (themselves), and leave the investor with nothing.

You also have to worry about the credit of the issuing company. What happens if UBS runs into real financial trouble? It’s not exactly known as a top tier bank these days.

The other ETF

There’s really only one name on this list that isn’t levered to hell, and that’s the last one. Let’s take a closer look at the SPDR Global Real Estate ETF.

It’s got $3.6 billion invested in REITs (and other real estate companies) that aren’t in the United States. 25.5% of assets are in Japan, followed by 15.5% in Australia, 12.6% in the UK, 11.6% in France, and so on. There are a bunch of countries represented.

The ETF has 135 different holdings, and it has an MER of 0.59%. The SPDR website lists the yield at closer to 8.6%, but it still seems like a decent income option. The other thing this fund has going for it is it’s a bet against the U.S. Dollar. If the dollar falls versus other currencies, those currencies will be more valuable. This will increase income without doing anything, at least in local currency.

If you’re looking for a real estate ETF for your portfolio, I don’t hate this one. You’ll only have minimal exposure to Canada’s housing bubble.

Tell everyone, yo!