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Historically, the financial sector has been a key source of yield for investors. Many of the largest financial institutions paid solid levels of income on a regular basis for decades, at least until 2008. In this dark time, many major institutions, which were cornerstones of many dividend-focused portfolios—such as Citigroup (C) and Bank of America (BAC)—were forced to drastically cut or even suspend dividends in order to survive. While many firms have resumed their payouts or boosted them as the economy has slowly rebounded, the promise of the financial sector as a dividend haven still has not returned on a large scale.
In fact, many popular financial sector ETFs are still paying out paltry sums to investors even though banking and the broad financial sector is on the mend. The ultra-popular Financial Select Sector SPDR (XLF) has a dividend of about 1.6% while the Dow Jones U.S. Financial Services Fund (IYG) offers a payout of just 1.1%, and the RevenueShares Financials Sector Fund (RWW) sees total dividends of just 1% on a yearly basis, hardly enough for most looking for robust current income levels in this low rate environment. This is especially true given the many other options for yield in the equity world at this time, as many funds in the utilities, consumer staples, or telecom spaces are not suffering from the same problems, paying out solid levels to investors in spite of the still sluggish economic environment (read Top Three High Yield Junk Bond ETFs).
Yet, investors should still note that these low dividend yields are not inherent to the broad financial sector at this time and that several corners of the market still offer outsized payouts. For investors who are searching for yield, we have highlighted three funds below which could offer excellent exposure while at the same time achieving high levels of dividend income. With this focus, the following ETFs could make for outstanding additions for those who are uncertain about adding too much to the non-cyclical sectors (such as utilities) but are looking to boost payouts nonetheless (all payouts are in TTM Distribution Yield terms):
iShares MSCI Emerging Markets Financials Index Fund (EMFN)
For investors seeking a high yield play that has room to grow over the years, EMFN is an interesting pick. The fund tracks a benchmark of emerging market financial firms, holding just under 100 securities in total and charging investors 67 basis points a year for its services. Currently, the fund is heavy in banks, while country exposure is tilted towards China (29.7%), Brazil (13.2%), and South Africa (10.7%). Currently, the product has a TTM yield of 6.3%, a level that should soothe those who are put-off by the fund’s relatively high beta and volatility. Additionally, it should be noted that the product is tilted towards giant and large caps so while the fund may be more volatile than more ‘traditional’ financial ETFs, its focus on giant securities and an average market cap of close to $25 billion should help allay some concerns (read EUFN: The Best ETF For The Euro Crisis).
PowerShares Global Listed Private Equity ETF (PSP)
If investors are searching for a diversified play on the private equity sector, PSP is a great high yielding choice. The fund tracks about 64 firms whose primary objective is to invest in and lend capital to privately held companies, charging investors a rather high 2.55% a year in fees for the service. Luckily for investors, the product’s yield is a robust 7.2%, suggesting that the fees will be easily offset by this payout. The product has a focus on American securities but European firms also comprise a good chunk of the assets as well with British, Swedish, and French companies rounding out the top nations. In terms of individual holdings, Leucadia National (LUK), Ratos AB and Onex Corp make up the top three, with each making up between 4.2% and 4.8% of PSP (see Top Three High Yield Global Sector ETFs).
PowerShares KBW High Dividend Yield Financial Fund (KBWD)
For a truly high yield product in the financial space, it is pretty hard to beat PowerShares’ KBWD. The fund tracks a dividend yield weighted index that looks to reflect about 24-40 companies in the financial space across a variety of the various financial subsectors. Currently, the fund holds 36 securities in total, charges 93 basis points a year in fees but pays out a whopping 10.8% in trailing twelve month yield terms, by far the highest in the space. However, investors should note that the product is focused in on American securities, suggesting that it may not be the most diversified from a geographic perspective when compared to others on the list (see Inside The SuperDividend ETF).
From an individual holding perspective, Chimera Investment Corp (CIM), American Capital Agency Corp (AGNC) and Apollo Investment Corp (AINV) take the top three spots in the fund, combining to make up about 17.5% of the total assets in KBWD. This top holdings list also suggests that the fund has a definite tilt towards those with heavy exposure to the REIT segment of the industry, a usual leader in terms of yields. In fact, these top three holdings have an average yield of 14.3% implying that this corner of the market is likely to carry the fund from a yield perspective going forward.
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