Money Smarts: Three ETFs For Income Investors
These three low-cost funds offer good diversification and steady cash flow.
Until the past few years, investors rarely thought of exchange-traded funds (ETFs) as an income source. Most people saw them as a stock proxy, deigned to generate capital gains as the market moved higher.
But all that has changed. Almost every ETF provider now offers a range of income-oriented funds, with more appearing all the time. In the first quarter of this year, we saw the launch of over a dozen new income ETFs including the BMO Canadian High Dividend Covered Call ETF (TSX: ZWC) and BMO U.S. Put Write Hedged to CAD ETF (TSX: ZPH).
These ETFs look interesting from a cash flow perspective. ZPH is currently yielding 6.7 per cent, based on its monthly payouts since February, while ZWC is yielding 6.2 per cent. However, both funds have been quite volatile so far, which will not sit well with conservative investors.
When I select ETFs for readers of my Income Investor newsletter, I look for those with a sustainable payout stream and relatively low volatility. Income investors tend to be older and are more interested in cash flow and stability than in capital gains.
Here are three that I like right now. Prices are as of the afternoon of July 27.
Horizons Active Preferred Share ETF (TSX: HPR)
Current price: $9.46
Annual payout: $0.3734 (trailing 12 months)
Yield: 3.9 per cent.
Risk: Higher risk
Comments: This is one of the few actively managed preferred share ETFs in Canada (Horizons also has an actively-managed Floating Rate ETF while Dynamic iShares recently launched a new one).
At the time I recommended it in The Income Investor, I said it offered good cash flow but warned that we could see a pullback in the share price if interest rates moved higher. In fact we saw a dip in the price after the units touched a 52-week high of $9.50 in early April, but they have rallied since, and were trading at $9.46 at the time of writing.
The portfolio is well diversified, and 95 per cent of the assets are rated P-3 or higher. The management fee is 0.55 per cent.
Summary: This ETF continues to be a good choice for investors who want some preferred share exposure.
BMO Equal Weight Utilities Index ETF (TSX: ZUT)
Current price: $17.89
Annual payout: $0.678 (trailing 12 months)
Yield: 3.8 per cent
Comments: This fund has been in a bit of a slump recently, reflecting weakness in the interest-sensitive utilities sector in face of rising rates. I see that as a buying opportunity.