3 High-Yield ETFs That Could Power Your Portfolio Higher

By George Budwell, Rich Smith, and Neha Chamaria Markets Fool.com

Exchange-traded funds, or ETFs, can be a powerful and smart way to pursue above-average income opportunities in the market. The short story is that ETFs provide instant diversification, thus lowering the risk of holding a single high-yield stock that may turn out to be a ticking time bomb later on down the road.

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Given the expansive universe of high-yield ETFs in existence at the moment, however, it's not exactly easy to choose the cream of the crop. Our Foolish team of dividend experts, though, think that the iShares Core High Dividend (NYSEMKT: HDV),theVanguard REIT ETF (NYSEMKT: VNQ), andtheSPDR S&P International Dividend ETF(NYSEMKT: DWX)could all boost your portfolio's earnings power to the next level. Here's why.

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Sustainable income with solid growth prospects

George Budwell(iShares Core High Dividend): While theiShares Core High Dividend Equity Fund's yield of 3.31% won't exactly knock your socks off, this well-diversified ETF does come with a rock bottom expense ratio of 0.12% and a solid track record of producing outstanding returns on capital. Long story short,theiShares Core High Dividend Equity Fund has marched steadily northward since its inception approximately 6 years ago, outperforming most of its peers in the process:

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HDV data by YCharts

What's underneath the hood? This ETFtracks a dividend-weighted index of 75 U.S. equities that pay a better than average yield. And as an added measure, the fund also screens equities for high earnings potential and dividend sustainability in order to up the overall quality of its holdings.

The net result is that theiShares Core High Dividend Equity Fund is made up of mostly dividend stalwarts like ExxonMobile, Chevron Corporation, Johnson & Johnson, Pfizer, among many others. That's an impressive roster of blue-chip companies by any measure and underscores why this ETF has performed so well during the market's lengthy bull run over the past several years.

As a prime example, J&J has been able to maintain one of the strongest balance sheet ratings among U.S. equities for decades, despite its heavy investment in its dividend program and R&D activities. Pfizer is also a well-known cash cow with outstanding free cash flows and a superb balance sheet in its own right.

In all, this dividend ETF offers a nice mix of high-quality equities, a respectable yield, and a bargain-basement expense ratio.

Rising interest rates? This REIT ETF is still a winner

Neha Chamaria(Vanguard REIT ETF): With a dividend yield of 6%, Vanguard REIT ETF is my top pic for income investors. As its name suggests, this ETF invests only in REITs, which also explains its high yields, though it isn't exactly a dividend-themed fund. As you might know, REITs are required to distribute at least 90% of their income to shareholders to avoid paying taxes.

This ETF, which tracks the MSCI US REIT Index, holds 156 real estate investment trust stocks that invest in properties across diverse sectors, including healthcare, industrials, offices, residential, and hotels. You can get a fair idea about the diversity within the REITs this ETF offers when you realize that its top holdings include names like Simon Property Group, Public Storage, Prologis, and Equinix. At about 23%, retail REITs have the largest exposure in this ETF, and residential and specialized REITs come in next with about 16% share in assets each.

You might be wondering why I'm optimistic about a REIT ETF in a rising interest rate scenario -- higher interest rates, after all, have traditionally hurt REIT valuations. Vanguard, however, has held up pretty strong in the past three months, and I wouldn't be surprised if it continues to do so. One reason is that most of the ETF's top holdings have strong track records of growth in funds from operations and dividends. Just to give you an example, Simon Property's dividend has grown at an annual compounded rate of 13.2% in the past five years.

Moreover, as Vanguard is a diversified ETF, there will ideally almost always be pockets of strength in its portfolio even during adverse times. Potential higher infrastructure spending under Donald Trump's presidency could, for instance, boost manufacturing activity and prospects for office and industrial REITs, allowing them to command higher rents. Likewise, higher consumer confidence bodes well for retail REITs, and so on.

Finally, this ETF's expense ratio of 0.12% is not only substantially lower than those of industry peers, but also among the lowest in the REIT space. That means greater savings and higher returns for shareholders while they enjoy the hefty dividends along the way.

The U.S. Dollar Is Strong, But It Won't Be Forever

Rich Smith (SPDR S&P International Dividend ETF): I don't know about you, but when I'm hunting for an investment, I like to search in places where other people are not searching -- because that's where you'll often find the best bargains.

Right now, the U.S. dollar is still not far off its five-year high, making companies' income earned (and dividends paid) in foreign currency worth relatively less when converted back into U.S. dollars. To my mind, that makes now a good time to look for foreign dividend payers as a promising investment -- because they'll be worth more once exchange rates turn around.

My pickfor this play on exchange rates is therefore the SPDR S&P International Dividend ETF, which tracks the 100 highest-yielding dividend-paying companies outside the U.S. This $1 billion fund carries a hefty, but not unreasonable, expense ratio of 0.45%, but a market-beating dividend yield of 5.1%. Even after deducting expenses, the SPDR S&P International Dividend ETF yields twice the average dividend yield on the S&P 500. Valuation-wise, this ETF's stocks carry an average P/E ratio of 17.1 -- which is also well below the S&P's average P/E of 25.7.

The SPDR S&P International Dividend ETF achieves diversification in its portfolio by capping exposure to any given region of the world at 25% (it's maxed out on financials right now, for example, and getting close to 25% on energy companies), and capping exposure to individual market sectors at 25% as well. Although DWX has underperformed over the past five years, it may finally be coming into its own here near the dollar's peak, and delivered a near 25% return to investors over the past year.

My bet: The SPDR S&P International Dividend ETF will continue to outperform as the dollar's value peaks, plateaus, and begins to drop off.

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The author(s) may have a position in any stocks mentioned.

George Budwell has no position in any stocks mentioned. Neha Chamaria has no position in any stocks mentioned. Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron and Equinix. The Motley Fool has a disclosure policy.