As the new tax year approaches, this article highlights the highest-yielding exchange-traded funds with a Morningstar Medalist Rating of Gold.
April 5 marks the last day to use the £20,000 ISA allowance, which protects dividends and coupons received from income tax.
But why choose ETFs over direct investments?
For those looking for a regular stream of income from their investments, a key consideration is whether the yield is maintained over time, and diversification can help ensure the portfolio remains robust in any market conditions.
Dividend stock investors face the possibility of falling into a “dividend trap,” which is when a high yield masks problems with high debt and profitability and a dividend is cut or scrapped.
However, ETFs attempt to counteract this by balancing their yield from current income with the portfolio’s long-term capital growth, as highlighted in a previous article on dividend ETFs. Strategies may vary from fund to fund, and it’s worth understanding how often the portfolio gets rebalanced and what index the ETF is replicating.
The Best Dividend-Paying Equity Income ETFs
iShares MSCI EM Latin America UCITS ETF LTAM
The £289.5 million iShares MSCI EM Latin America UCITS ETF fell 16.79% over the past year. The fund fell further than its benchmark, the Morningstar Emerging Markets Americas Target Market Exposure Index, by 0.94 percentage points. Year to date, the iShares fund rose 7.05%. Over the past five years, the fund has climbed 1.56%.
WisdomTree Emerging Markets Equity Income UCITS ETF DEM
The £117.5 million WisdomTree Emerging Markets Equity Income UCITS ETF rose 7.04% over the past year. The fund lagged its benchmark, the Morningstar Emerging Markets Target Market Exposure Index, by 2.16 percentage points. Year to date, the WisdomTree fund rose 1.44%. Over the past five years, the fund has climbed 7.05%.
WisdomTree Europe SmallCap Dividend UCITS ETF DFE
The £45.5 million WisdomTree Europe SmallCap Dividend UCITS ETF rose 8.13% over the past year. The fund lagged its benchmark, the Morningstar Developed Europe Small Cap Target Market Exposure Index, by 0.75 percentage points. Year to date, the WisdomTree fund rose 3.68%. Over the past five years, the fund has climbed 6.49%.
iShares Edge MSCI Europe Value Factor UCITS ETF IEDL
The £1.3 billion iShares Edge MSCI Europe Value Factor UCITS ETF rose 18.5% over the past year. The gain on the passively managed fund beat the 13.28% gain on the average fund in the Europe large-cap value equity category, leaving it in the 22nd percentile for performance. The fund beat its benchmark, the Morningstar Developed Europe Value Target Market Exposure Index, by 0.91 percentage points. Year to date, the iShares fund rose 12.62%, while the average fund in its category rose 9.83%. Over the past five years, the fund has climbed 11.4% compared with the 9.26% gain for the category.
Fidelity Emerging Markets Quality Income UCITS ETF FEME
The passively managed Fidelity Emerging Markets Quality Income UCITS ETF gained 5.93% over the past year, underperforming the average fund in the global emerging markets equity category, which rose 8.49%. The fund placed in the 75th percentile for performance and lagged its benchmark, the Morningstar Emerging Markets Target Market Exposure Index, by 3.27 percentage points. The £83.6 million fund has lost 0.81% year to date, while the average fund in its category is up 1.37%. Over the past five years, the Fidelity International fund has climbed 4.84% compared with the 3.79% gain for the category.
The Best High-Yielding Fixed-Income ETFs
iShares $ TIPS 0-5 UCITS ETF TIP5
The passively managed iShares $ TIPS 0-5 UCITS ETF gained 7.15% over the past year, outperforming the average fund in the USD inflation-linked bond category, which rose 6.47%. The fund placed in the 11th percentile for performance and performed roughly in line with its benchmark, the Morningstar US Treasury Inflation-Protected Securities Index. The £1.3 billion fund has gained 1.52% year to date, while the average fund in its category is up 2.99%. Over the past five years, the iShares fund has climbed 3.82% compared with the 1.55% gain for the category.
iShares $ Short Duration High Yield Corp Bond UCITS ETF SDHG
The £1.4 billion iShares $ Short Duration High Yield Corp Bond UCITS ETF rose 12.19% over the past year. The fund beat its benchmark, the Morningstar US High-Yield Bond Index, by 1.61 percentage points. Year to date, the iShares fund rose 1.57%. Over the past five years, the fund has climbed 5.5%.
Xtrackers USD High Yield Corporate Bond UCITS ETF XUHY
The passively managed Xtrackers USD High Yield Corporate Bond UCITS ETF gained 10.03% over the past year, outperforming the average fund in the USD high-yield bond category, which rose 9.07%. The fund placed in the 31st percentile for performance and lagged its benchmark, the Morningstar US High-Yield Bond Index, by 0.55 percentage points. The £459.1 million fund has gained 1.48% year to date, while the average fund in its category is up 1.22%. Over the past five years, the Xtrackers fund has climbed 4.52% compared with the 4.14% gain for the category.
iShares $ Floating Rate Bond UCITS ETF FLOT
The £3.8 billion iShares $ Floating Rate Bond UCITS ETF rose 6.47% over the past year. The gain on the passively managed fund was roughly in line with the 6.47% gain on the average fund in the USD corporate bond category, leaving it in the 60th percentile for performance. The fund lagged its benchmark, the Morningstar US Corporate Bond Index, by 0.55 percentage points. Year to date, the iShares fund rose 0.34%, while the average fund in its category rose 1.82%. Over the past five years, the fund has climbed 3.49% compared with the 0.16% loss for the category.
Vanguard USD Emerging Markets Government Bond UCITS ETF VDET
Over the past year, the passively managed Vanguard USD Emerging Markets Government Bond UCITS ETF rose 10.21%, while the average global emerging markets bond fund gained 8.43%. The fund placed in the 36th percentile for performance and beat its benchmark, the Morningstar Emerging Markets Sovereign Bond Index, by 2.6 percentage points. The £924.5 million fund has climbed 2.08% year to date, underperforming the average fund in its category, which rose 2.25%. Over the past five years, the Vanguard fund is up 1.21%, while the average fund in its category is up 0.66%.
Screening for the Best High-Yielding ETFs
Exchange-traded funds, or ETFs, are often low-cost instruments for investors to track popular indexes or leverage experienced manager choices in an attempt to beat the market. The best ones serve as building blocks for a portfolio, and unlike open-end mutual funds, all ETFs are traded throughout the day on an exchange.
The ETFs mentioned in this article are all available to UK investors, have a Morningstar Medalist Rating of Gold, and a 12-month yield of at least 2%. The share classes featured are chosen based on lowest fees and retail share class where possible.
The Morningstar Medalist Rating for funds is a five-tier system used to assess a fund’s ability to outperform its Morningstar Category index after fees. This system operates on a scale ranging from Gold to Negative, with Gold, Silver, and Bronze ratings indicating that analysts expect that particular investment vehicle to outperform its Morningstar Category index over a long-term period.
This article was generated with the help of automation and reviewed by Morningstar editors. Learn more about Morningstar’s use of automation.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
