Exchange-traded funds (ETFs) are great tools for retirees to gain diversified access to equities that fulfill investment goals, including income generation, stability, and growth. With thousands of ETFs available, investors can choose whichever niche suits their individual needs best.
Retirees shouldn't stray too far from established portfolio construction guidelines, but they can allocate slightly more to certain funds that fit their overall retirement planning strategy. Investment income is obviously important during retirement when earned income stops.
Many ETFs are designed to maximize the income provided to shareholders, and the amount of capital returning to investors is measured by the distribution yield. This is similar to dividend yield, but it is calculated by dividing ETF shareholder distributions by the net asset value (NAV), rather than share price.
These three dividend ETFs have high distribution yields paired with other characteristics that should be attractive for retirees.
1. FlexShares International Quality Dividend Index Fund
The FlexShares International Quality Dividend Index Fund (IQDE 0.54%) is constructed by screening non-U.S. large-cap stocks for high dividend yields and fundamental financial characteristics that provide stability. As a result, the ETF has a 3.5% distribution yield with the potential for price appreciation with the market in general. The portfolio is diversified across 190 holdings, which are skewed toward the financial, technology, and consumer cyclical sectors.
With a 0.13% average bid-ask spread and daily trading volume above $1.5 million, this is a sufficiently liquid ETF to provide easy and efficient trading for most individual investors. However, prospective buyers should be aware of a relatively high 0.47% expense ratio that will erode those dividends each year it is held. The fund may produce enough unique value to justify such an expense, but it should still be considered by investors.
2. Global X SuperDividend U.S.
The Global X SuperDividend U.S. ETF (DIV 0.52%) holds U.S. stocks that pass screens for both low volatility and high dividend yield. This methodology has led to high exposure to financials and energy through real estate income trusts (REITs) and master limited partnerships (MLPs), many of which are paying high yields because of their obligation to distribute earnings to shareholders as well as the current poor market performance of the real estate and energy sectors. It also has significant holdings in consumer discretionary stocks.
Over-exposure to certain sectors can be a problem because of a lack of diversification, but buy-and-hold income investors will benefit from a strong distribution yield and a portfolio of theoretically low volatility. This ETF has sufficient liquidity and bid-ask spreads, but the 0.46% expense ratio owing to more complex methodology is high relative to other funds. Nonetheless, the 8.22% distribution yield is attractive enough to tolerate that expense, even if the yield is only temporarily higher due to market conditions.
3. Roundhill Acquirers Deep Value
The Roundhill Acquirers Deep Value ETF (DEEP 1.01%) has holdings in U.S. stocks of all market caps. The fund selects value stocks and allocates within that selection based on screens for financial fundamentals and quality factors, such as strong margins and low earnings volatility. The Roundhill management team then takes the 100 best stocks from this analysis and weighs them equally. The resulting allocation is great for retirees because the fund holds stable companies with reasonable valuations and pays a healthy 5.97% distribution yield as of December 2020. This should result in both low volatility and strong investment income.
However, potential buyers should recognize some downsides. The ETF is small, with only $31 million in assets under management. The fund's average daily trading volume is only $350,000, which leads to a wide bid-ask spread. It could be difficult or expensive to trade for investors who want to unload shares quickly. It also carries a hefty 0.8% expense ratio that will drag on returns moving forward. Long-term buy-and-hold investors who put a premium on stability and income may easily overlook these flaws, but it must be part of the consideration for any buyer.