Some methods of generating passive income can be quite complex. For example, you could invest in real estate. But that usually involves managing the property or paying someone else to do it.
If you are looking for easy ways to generate passive income, you may want to check out Vanguard’s site. exchange-traded funds (ETFs). Vanguard has been making investing simple for decades. And one of its funds should be particularly attractive to income hunters. Investing $100,000 in this Vanguard ETF could generate over $6,800 in annual income.
A different version of bonds
Vanguard offers more than 20 ETFs that invest in bonds. However, the Vanguard Emerging Markets Government Bond ETF (NASDAQ:VWOB) offers a different twist from the others.
As its name suggests, this Vanguard ETF primarily holds bonds issued by governments of emerging market countries. It attempts to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index.
However, the ETF’s holdings don’t always exactly match those of the Bloomberg Index. As an example, the Vanguard Emerging Markets Government Bond ETF currently owns 727 bonds with a yield to maturity of 7.2% and an average duration of seven years. Its benchmark index holds 709 bonds with an actuarial yield of 7.8% and an average duration of 6.9 years.
Although this Vanguard ETF focuses primarily on emerging market bonds, it has other holdings. Currently, approximately 2.6% of the fund’s assets consist of bonds issued outside of emerging markets, most of which were issued by European governments.
Vanguard is known for its low costs. The Vanguard Emerging Markets Government Bond ETF is no exception, with a spending rate of 0.2%, which is well below the average expense ratio of 0.97% of similar funds.
An impressive income generator
Arguably the best way to assess a bond ETF’s performance is to use the Securities and Exchange Commission’s (SEC) 30-day yield. This yield is calculated by annualizing the current market yield to maturity of the bonds held by the fund over a rolling 30-day period. The Vanguard Emerging Markets Government Bond ETF offers a 30-day SEC yield of 6.82%, by far the highest in the Vanguard family.
The math is simple to determine the annual income this Vanguard ETF could generate in a year. An initial investment of $100,000 would generate $6,820 in income based on the ETF’s current 30-day SEC yield.
There is also another advantage for income investors. The Vanguard Emerging Markets Government Bond ETF pays its distributions monthly rather than quarterly.
Some disadvantages
This ETF has some drawbacks. Although it generates significant revenue, its performance tends to be poor. Since the fund’s inception in May 2013, its price has only increased by an average of 2.61% per year.
Vanguard ETF returns also fluctuate. There is no guarantee that you will be able to continue to receive as much income in the future from a $100,000 investment as you do today.
Unlike ETFs that hold tax-free bonds (such as municipal bonds), all distributions from the Vanguard Emerging Markets Government Bond ETF are taxable. This could reduce your effective income somewhat.
Finally, the level of risk associated with holding bonds issued by emerging market governments is higher than that associated with holding bonds issued by the U.S. government. However, this ETF is not very risky. Vanguard gives it a risk/reward rating of 3 on a scale of one to five.
Despite these drawbacks, the Vanguard Emerging Markets Government Bond ETF could be attractive to many investors. However, make sure that if you buy this Vanguard ETF, it is part of a well-diversified overall portfolio.
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Investing $100,000 in this Vanguard ETF could generate over $6,800 in annual income was originally published by The Motley Fool
