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Stable, High Yields (Bonds Not Included)

There are other options for investors who are bearish on bonds.

Abraham Bailin, 01/10/2011

This article first appeared in the December 2010/January 2011 issue of Morningstar Advisor magazine. Sign up for your free subscription here.

Investors have continued to pour assets into bond funds in pursuit of stable returns. Since 2009, quarterly net flows into bond- focused mutual funds and exchange-traded funds averaged just more than $92 billion, and the trend doesn't seem to have eased off. Bonds funds saw $89 billion in net flows during the third quarter of 2010. Sustained inflows and loose monetary policy have depressed yields, prompting worries about a bubble. Will the bubble pop, and if so, what might the repercussions be?

Investors expecting anemic economic growth might buy bonds at today's rates. If inflation ramps up, however, current yields are likely to rise and bond prices are likely to fall. Higher inflation could generate losses for today's bond investors, a timely concern given the likeli- hood of a second round of quantitative easing.

Yield-focused investors face stable returns on the one hand and inflationary losses on the other. In this screen, we use Morningstar Principia to identify high-yielding, liquid ETFs outside of the bond space.

Filtering out municipal and taxable bonds, we focus on ETFs whose 12-month yields are greater than 4.5%.

Security Type = ETF
And Morningstar Category not = Municipal bond
And Morningstar Category not = Taxable bond
And 12-month yield > 4.5%

As of Nov. 1, 21 ETFs passed this screen. Morningstar Office users can further refine the screen to find ETFs with all the above qualities and also maintain daily trading volumes above 25,000 shares; out of the 12 ETFs that jumped through all of these hoops, these stood out.

iShares S&P U.S. Preferred Stock Index PFF
Our screen returned a number of preferred- share funds; this isn't surprising: Preferred equity securities offer consistent high yields.

Abraham Bailin is an ETF Analyst with Morningstar.

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