This Vanguard ETF offers investors an easy way to earn passive income every month.
Some ways to generate passive income can be quite complicated. For example, you could invest in real estate, but that usually requires you to manage the property or pay someone to do it for you.
If you’re looking for an easy way to earn passive income, you might want to check out Vanguard exchange-traded funds (ETFs). Vanguard has been making investing simple for decades, and one of its funds is especially appealing to income seekers: Investing $100,000 in this Vanguard ETF could generate more than $6,800 in income per year.
New developments in bonds
Vanguard offers more than 20 ETFs that invest in bonds. Vanguard Emerging Markets Government Bond ETF (VWOB -0.08%) It gives it a different twist than the others.
As the name suggests, this Vanguard ETF holds bonds issued primarily by governments of emerging market countries and seeks to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index.
However, ETF holdings don’t always match Bloomberg indexes perfectly. As an example, the Vanguard Emerging Markets Government Bond ETF currently holds 727 bonds with a yield of 7.2% and an average duration of 7 years, while the benchmark index holds 709 bonds with a yield of 7.8% and an average duration of 6.9 years.
This Vanguard ETF is primarily focused on emerging market bonds but does hold other assets: Currently, about 2.6% of the fund’s assets are in bonds issued outside emerging markets, most of which are issued by European governments.
Vanguard is known for its low costs, and the Vanguard Emerging Markets Bond ETF is no exception, with an annual expense ratio of 0.2%, well below the average expense ratio of 0.97% for similar funds.
Great source of income
Perhaps the best way to assess the yield of a bond ETF is to use the 30-day Securities and Exchange Commission (SEC) yield, which is calculated by annualizing the current market maturity yield of the bonds the fund holds over the past 30 days. The Vanguard Emerging Markets Bond ETF has a 30-day SEC yield of 6.82%, by far the highest in the Vanguard family.
It’s easy to do the math to see how much annualized return this Vanguard ETF would generate over a one-year period: Based on the ETF’s current 30-day SEC yield, an initial investment of $100,000 would yield $6,820.
There’s another benefit for income investors: The Vanguard Emerging Markets Bond ETF pays distributions monthly instead of quarterly.
Some drawbacks
This ETF has some drawbacks: Despite its strong returns, it tends to perform poorly: Since the fund’s inception in May 2013, its price has risen an average of just 2.61% per year.
Vanguard ETF yields also fluctuate, and there is no guarantee that investing $100,000 will continue to earn you the same amount in the future as you do today.
Unlike ETFs that hold tax-exempt bonds (such as municipal bonds), all distributions from the Vanguard Emerging Markets Bond ETF are taxable, which may reduce your effective income somewhat.
Finally, the risk level of holding bonds issued by emerging market governments is higher than the risk level of holding bonds issued by the U.S. government. However, this ETF is not particularly risky. Vanguard gives this ETF a risk/reward rating of 3 on a scale of 1 to 5.
Despite these drawbacks, the Vanguard Emerging Markets Bond ETF may be attractive to many investors, but if you do buy this Vanguard ETF, make sure it’s part of an overall well-diversified portfolio.
Keith Speights has no investment in any of the stocks mentioned herein. The Motley Fool has no investment in any of the stocks mentioned herein. The Motley Fool has a disclosure policy.
