3 High-Yielding ETFs I Can't Wait to Buy for Passive Income This September | The Motley Fool (2024)

I want to be able to retire early. It's not that I don't want to work (I truly love what I do and hope to keep doing it for a very long time), I don't just like the stress of having to make money to live. That's why I'm working hard right now to become financially independent so that I can be in the position to retire early if I ever want to do that.

Generating passive income is a core aspect of my strategy. My goal is to grow my passive income to the point where it covers my routine expenses. I have found that exchange-traded funds (ETFs) can be great passive income investments. Because of that, I routinely invest in ETFs that offer a high dividend yield. Here are three high-yielding ETFs I can't wait to buy more of this September.

JPMorgan Equity Premium Income ETF

JPMorgan Equity Premium Income ETF (JEPI 0.48%) aims to deliver monthly distributable income to its investors. It also seeks to provide them with lower-volatility equity market exposure. In other words, it tries to provide a bond-like income stream with upside potential.

The dividend ETF lives up to its name. The annualized income yield of its most recent payment was 6.9%. Meanwhile, its dividend yield over the past 12 months is 7.6%. This level rivals high-yield junk bonds (7.9% yield) and is much higher than other income-focused investments like real estate investment trusts (4.4%) and the 10-year U.S. Treasury Bond (4.4%).

The ETF generates such a generous income stream with a two-pronged strategy: investing in a defensive portfolio of high-quality stocks selected based on its proprietary rankings, andwriting out-of-the-money call options on the S&P 500 index. You can read more about options trading here, but simply put, the ETF is hedging on its stock holdings with a bet that the S&P 500 won't close above a given price on a certain date.This strategy produces options premium income that the fund distributes to investors each month.

Add them together and the fund provides investors with passive income and upside potential with less volatility. Those features make it a great fit for my portfolio.

iShares 0-3 Month Treasury Bond ETF

iShares 0-3 Month Treasury Bond ETF (SGOV 0.05%) invests in short-term U.S. Treasury bills (T-bills) with remaining maturities of three months or less. Short-term T-bills carry minimal risk (treasuries are often called "risk-free" investments). Meanwhile, they offer a generous income yield (currently around 5.2%).

This ETF is a great place to park idle cash. Many brokerage accounts don't pay high yields on cash (at least, mine doesn't). Because of that, investors who like to have a meaningful cash position (like me) are losing out in the current higher-interest-rate environment.

I've found that investing most of my idle cash into iShares 0-3 Month Treasury Bond ETF is a great way to generate some incremental passive income. The fund makes cash distributions each month, which I can reinvest in this ETF or another income-generating investment. It's also highly liquid, which means you can sell shares when you need the cash for another investment.

SPDR Portfolio High Yield Bond ETF

SPDR Portfolio High Yield Bond ETF (SPHY) provides exposure to the large and lucrative junk bond market. U.S. high-yield debt is a more than $1 trillion market. These bonds offer higher yields than investment-grade bonds to compensate investors for their higher risk of default. This ETF's distribution yield has averaged 7.7% over the past year).

While high-yield bonds are riskier, this ETF helps mute some of that through diversification. It currently holds over 1,925 bonds from issuers across a broad array of sectors (bonds issued by consumer cyclical companies are the largest at 20.5%). Diversification across issuers and sectors helps reduce default risk.

SPDR Portfolio High Yield Bond ETF makes monthly distribution payments. While those payments will ebb and flow with interest rates and the economic cycle, this ETF can generate more income than one focused on investment-grade corporate bonds like iShares iBoxx $Investment Grade Corporate Bond ETF. It's a good ETF for those seeking to earn a little more income on a small slice of their fixed-income portfolio.

Padding my passive income

I believe passive income will be my ticket to financial freedom. That's why I invest some of my active earnings each month into vehicles that generate passive income, like higher-yielding ETFs. This strategy enables me to grow my passive income each month, putting me a little closer to my goal of becoming financially independent.