Treasury yields are back around 4.6%, which is good news for income seekers in theory. But in practice, it creates a dilemma.
Higher Treasury yields make bonds more attractive, but geopolitical and inflation risks could push rates even higher, making traditional bond investments potentially risky. You don’t want to lock into long-term bonds right now if rates are still climbing.
Meanwhile, simply chasing yield in the equity markets can expose you to unnecessary volatility or dividend cut risk. There’s no point generating income if the underlying investment collapses.
This creates a real challenge: how do you generate meaningful passive income without taking excessive risk? The answer lies in looking beyond traditional stocks and bonds into alternative asset classes that offer different risk and yield profiles.
Four ETFs stand out as worth considering for long-term income portfolios. Each operates on different principles and offers different yield characteristics.
High-Dividend Equities: Broad Diversification
The most straightforward approach is to focus on high-dividend-paying stocks. The Vanguard High Dividend Yield ETF takes this approach by starting with a broad universe of US stocks, identifying those with the highest forecasted dividend yields, and selecting the top half for the fund.
The result is a 2.3% yield from a well-diversified portfolio of 600+ holdings spread across multiple sectors. The fund has at least 8% allocated across seven different sectors, providing broad exposure without the tech concentration you see in the S&P 500.
This is a more conservative entry into the high-yield equity space. You’re not chasing extreme yields. You’re simply getting paid more than the S&P 500 average while maintaining reasonable diversification.
The tradeoff: the screening process is relatively loose, so the dividend quality varies across holdings. But for a buy-and-hold investor seeking steady income, this is a reliable building block.
Covered Calls: Sacrificing Upside for High Yield
The JPMorgan Equity Premium Income ETF operates on a completely different principle. It’s a covered-call fund, which means it uses low-volatility stocks as its underlying portfolio and then writes call options on the S&P 500 to generate premium income.
This approach produces an 8% yield, which is substantially higher than traditional dividend stocks. But there’s a real tradeoff: you sacrifice share-price upside in exchange for that high yield. If the market rallies significantly, you won’t participate fully because your shares will be called away.
Where does this work? Covered-call funds shine during sideways or down-trending markets. In 2022, when the market was struggling, covered-call funds outperformed because the consistent income combined with lower volatility provided better risk-adjusted returns.
But in bull markets, they underperform. You need to size this appropriately—probably no more than 5-10% of your portfolio—and view it as a risk diversifier that boosts income in the right market conditions, not as your core holding.
Real Estate: Sector-Specific Exposure
Real estate investment trusts (REITs) are required to pay out at least 90% of their taxable income to shareholders, which is why they typically offer attractive yields. The Vanguard Real Estate ETF is the largest REIT ETF in the industry and currently offers a 3.4% yield.
That’s a solid yield, but there’s an important caveat: REITs are highly rate-sensitive. When interest rates rise, REIT valuations typically fall because rising rates make the cash flows from real estate less attractive relative to bonds. When rates fall, REITs can rally sharply.
Given current rate levels and uncertainty about whether rates will stay elevated or decline, REITs are less of a safe income play and more of a market bet. That’s why it makes sense to allocate modestly to this—maybe 5-10% of your portfolio—and view it as a longer-term holding that benefits from either rate declines or strong real estate fundamentals.
Preferred Shares: Hybrid Securities
Preferreds are hybrid securities that sit between common stocks and bonds. They have characteristics of both. They sit ahead of common shareholders in the capital stack if a company gets liquidated, which provides some downside protection. But they still carry credit risk if the company fails.
The iShares Preferred & Income Securities ETF is the largest ETF in this category and currently offers a 5.5% yield. Interestingly, preferreds exhibit volatility similar to intermediate-term Treasuries, which makes them more predictable than common stocks.
Preferreds become vulnerable to economic deterioration (because credit quality matters) and to rising interest rates (because they’re similar to bonds). But in stable economic environments, they offer yield enhancement without the equity-market volatility of common stocks.
Like REITs, preferreds are better suited to modest portfolio allocations—maybe 5-10%—where they can provide yield enhancement without taking up too much of your portfolio if conditions deteriorate.
Building a Diversified Income Portfolio
The key insight is that each of these ETFs behaves differently. They have different sensitivities to rates, market conditions, and economic cycles. That’s what makes them valuable for income investors.
Instead of putting all your eggs in one yield-producing basket, you can build a diversified income approach:
High-dividend stocks for stable, consistent yield with broad diversification. Covered-call funds for income that can provide diversification during sideways or down markets. REITs for exposure to real estate and rate-decline opportunities. Preferreds for hybrid bond-like income with better rates than corporate bonds.
Each serves a different role. Each has different risks. None should dominate your portfolio.
The Reality Check
Let’s be clear: if you’re looking for 8% yields across your entire portfolio without taking risk, that’s not realistic. The 8% yield from covered-call funds comes from sacrificing upside. The REIT yields come with rate sensitivity. The preferred yields come with credit risk.
But if you’re willing to diversify across asset classes and size allocations appropriately, you can build a portfolio that generates 4-6% average yield while managing different types of risk.
The 4.6% Treasury yield sets a baseline. Your goal shouldn’t be to beat that aggressively everywhere. Your goal should be to generate reasonable incremental yield from different sources while maintaining a portfolio that won’t fall apart if any single asset class experiences stress.
These four ETFs offer ways to do exactly that.
Are you building an income portfolio? Let us know your preferred asset classes.
Four Passive Income ETFs: Comparison
| ETF | Ticker | Yield | Primary Characteristic | Risk Profile | Best For |
|---|---|---|---|---|---|
| Vanguard High Dividend Yield | VYM | 2.3% | Broad dividend stocks | Low-moderate | Core income holding |
| JPMorgan Equity Premium Income | JEPI | 8.08% | Covered calls | Upside-capped | Sideways markets, diversifier |
| Vanguard Real Estate | VNQ | 3.49% | Real estate (REITs) | Rate-sensitive | Rate-decline opportunity |
| iShares Preferred & Income | PFF | 5.52% | Hybrid securities | Credit/rate risk | Bond-like income |
Allocation Suggestion (Example):
- VYM: 60% (core holding)
- JEPI: 10% (risk diversifier)
- VNQ: 10% (real estate exposure)
- PFF: 10% (preferred income)
- Bonds/Cash: 10% (flexibility)
Key Consideration: Current rate environment (10-year Treasury at 4.6%) suggests measured approach to rate-sensitive assets (REITs, preferreds). Diversification across asset classes provides better risk-adjusted returns than chasing highest yield in single category.
What to Watch:
- Fed rate trajectory (impacts REIT and preferred valuations)
- Market direction (impacts covered-call performance)
- Dividend sustainability (monitors dividend cut risk in equity portfolio)
