Interest rates have trickled higher in 2021, putting a damper on the performance of popular bond exchange-traded funds. The Vanguard Total Bond Market ETF (BND) has declined 1.9% since the start of the year and is underperforming peer asset classes like stocks, commodities and real estate.

The story has been much worse for yield chasers. For example, income-hungry investors who piled into bond ETFs with longer maturities have been hit hard. The iShares 20+ Year Treasury Bond ETF (TLT) has fallen 9.2% year to date. Long-dated bonds get hit the hardest when interest rates trend higher, and that’s the scenario playing out now.

Even though rates have gone up, yields offered by bond ETFs remain paltry. BND’s yield of 1.37% isn’t providing much income, especially after factoring in inflation. Same goes for the 2.07% yield offered by TLT.

But there are some alternatives for income-seeking investors.

Preferred Securities
Because they share characteristics of both stocks and bonds, preferred securities offer a happy medium for income-minded investors.

Often referred to as “hybrids,” preferred securities make regular fixed payments and have a par value that is returned to the investor when the securities mature or are redeemed by the issuing company.

The AAM Low Duration Preferred & Income Securities ETF (PFLD) owns preferred securities issued by U.S.-based companies. Most of the fund’s sector exposure is concentrated in real estate (26.4%), financial services (21.9%) and banking (20.1%). 

Since most preferred securities have very long maturities—usually 30 years or more—the PFLD aims to hedge this risk by owning shorter-duration preferreds.

PFLD carried a recent dividend yield of 5.17%. The fund pays monthly distributions and charges annual expenses of 0.45%.

Another alternative in the preferred market is the SPDR ICE Preferred Securities ETF (PSK). The fund carries a yield of 4.18% and charges 0.45%. The fund focuses on U.S- listed preferreds, and like PFLD it offers monthly income distributions.

PSK is a heavily concentrated portfolio with a nearly 70% exposure to the financial sector. Utilities (15.1%) and real estate (6.9%) round out the fund’s other top sectors.

Foreign Bonds
Launched in 2007, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) is the oldest fixed-income ETF targeting emerging markets. It tracks an index composed of U.S. dollar-denominated emerging market bonds across more than 30 emerging market countries.

Aside from EMB’s diversified credit risk, exposure to emerging market bonds is a segment of the fixed-income market that many income investors miss. The EMB fund charge an annual expense of 0.39% and carries a yield of 3.75%.

Combining EMB with core exposure to a broad-market U.S. bond ETF like BND or the SPDR Portfolio Aggregate Bond ETF (SPAB) is a good strategy for remaining diversified while increasing yield income. SPAB seeks to follow the performance of the Bloomberg Barclays U.S. Aggregate Bond Index, and it offers a yield of 1.40%.

Summary
Income-minded investors don’t need to chase yield offered by expensive strategies in order to get more income. It’s a message financial advisors should be evangelizing to their clients. In the end, adding affordable exposure to overlooked segments of the fixed-income market is a better yield strategy.

Ron DeLegge is founder and chief portfolio strategist at ETFguide, and is the author of "Habits Of The Investing Greats."