Put your money to work, sit back, and reap the rewards. These are the primary steps involved in generating passive income.
Investing in exchange-traded funds (ETFs) offers an easy way to follow this process. Vanguard is one of the top ETF managers known for its low costs. While many of the company’s 90 ETFs are good alternatives for investors seeking passive income, a handful offers especially attractive yields. Investing $30,000 in these Vanguard ETFs could make you over $1,700 in passive income.
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1. Vanguard Emerging Markets Government Bond ETF
Which Vanguard ETF pays the highest yield right now? The Vanguard Emerging Markets Government Bond ETF (VWOB 0.05%) is the clear winner. Its 30-day Securities and Exchange Commission (SEC) yield (which measures the annualized yield to maturity over the last 30 days as a percentage of total assets) is a sky-high 6.42%. An investment of $10,000 (one-third of the total of $30,000) would generate passive income of $642 over 12 months at that rate.
This ETF focuses on bonds issued by governments in emerging markets. It currently owns 740 bonds with an average effective maturity of 11.8 years. Over 97% of these bonds were issued by governments in emerging nations such as Argentina, Brazil, and Mexico. The remaining bonds were issued by governments in Europe, the Middle East, North America, and elsewhere.
While the Vanguard Emerging Markets Government Bond ETF is a good pick for income, it’s unlikely to deliver impressive share price appreciation. The fund has risen by an average of only 3.09% since its inception in May 2013.
Also, many investors like to own bonds and bond funds to reduce their risk. However, the Vanguard Emerging Markets Government Bond ETF is riskier than many bond funds because of the volatility associated with emerging markets. If you’re risk-averse, this Vanguard ETF probably won’t be a good fit for you.
2. Vanguard Long-Term Corporate Bond ETF
The Vanguard Long-Term Corporate Bond ETF (VCLT) is currently the second-best option in the Vanguard family for investors seeking passive income. This fund’s 30-day SEC yield is 5.69%. With that yield, if you invested another $10,000 in this Vanguard ETF, you could make around $569 in income.
As its name indicates, the Vanguard Long-Term Corporate Bond ETF invests mainly in corporate bonds with relatively long-term maturities. It owns 2,954 corporate bonds with an average effective maturity of 22.4 years.
Like any ETF, this Vanguard fund comes with some risks. Its price can fluctuate quite a bit, and some bond issuers could default. However, the sheer number of bonds in the ETF’s portfolio helps mitigate the risk of default to some extent. Also, the Vanguard Long-Term Corporate Bond ETF owns only high-quality investment-grade bonds with lower risks of defaulting.
This isn’t an ideal choice if you’re looking for impressive growth, though. The Vanguard Long-Term Corporate Bond ETF has delivered an average annual return of 4.73% since its inception in November 2009. Over the last five years, the fund has declined by an annual average of 2.28%.
3. Vanguard Intermediate-Term Corporate Bond ETF
Perhaps, unsurprisingly, a similar ETF is Vanguard’s third-best alternative for income investors. The Vanguard Intermediate-Term Corporate Bond ETF‘s (VCIT -0.09%) 30-day SEC yield is 5.18%. A $10,000 investment would generate $518 in passive income, bringing our total for all three Vanguard ETFs to $1,729.
The Vanguard Intermediate-Term Corporate Bond ETF owns 2,238 corporate bonds with an average effective maturity of 7.3 years. All those bonds are investment grade, with 41.8% having a credit rating of A (which reflects a strong likelihood of being able to meet financial obligations).
The pros and cons associated with the Vanguard Long-Term Corporate Bond ETF generally apply to this ETF as well. However, the Vanguard Intermediate-Term Corporate Bond ETF has weathered the bond market’s headwinds better in recent years, with an average annual return of 0.65% since 2020. Its average annual return since its inception in November 2009 is 4.22%.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
