9 Top ETFs for Income Investors That Stood Out in 2025

Key Concepts

• Factor Investing: Analyzing and utilizing specific risk factors (value, quality, low volatility) to understand and potentially enhance investment returns.
• Dividend ETFs: Exchange Traded Funds focused on companies that pay dividends, categorized by growth or income strategies.
• Bond ETFs: Exchange Traded Funds investing in fixed-income securities, ranging from core market exposure to higher-yield, multi-sector strategies.
• Cover Call ETFs: Exchange Traded Funds that generate income by owning an underlying asset and selling call options on it, capping potential upside.
• Market Cap Weighting: Constructing a portfolio where the weight of each holding is proportional to its market capitalization.
• Expense Ratio: The annual cost of owning an ETF, expressed as a percentage of assets.
• Bloomberg US Aggregate Index: A broad benchmark representing the U.S. investment-grade bond market.

Dividend ETFs: Focusing on Income and Growth

Brian Armor, Director of ETFs and Passive Strategies Research at Morning Star, discussed the nuances of dividend ETFs. He explained that factor investing involves quantifying risk factors like value (price relative to fundamental value – book value or earnings), quality (consistency and profitability of earnings), and low volatility (historical price fluctuations). Dividend income strategies generally lean towards value and low volatility, potentially sacrificing some quality. The goal is to find ETFs that balance these factors, controlling risk, diversifying broadly, and minimizing costs (low turnover, low fees).

Four dividend ETFs received Morning Star’s Gold Medalist rating:

• Vanguard Dividend Appreciation ETF (VIG): Focuses on companies with a 10-year track record of increasing dividend payments, employing market cap weighting for reduced turnover and lower costs.
• Vanguard International Dividend Growth ETF (VIGI): Similar to VIG, but focuses on international companies with a 7-year history of increasing dividends.
• Vanguard High Dividend Yield ETF: Filters for companies with above-average dividend payouts, also market cap weighted, offering higher yield but with a trade-off in risk.
• Schwab US Dividend Equity ETF (SCD): Targets consistent dividend payers and profitable companies, with a smaller portfolio of 100 stocks, potentially offering higher income and profitability.

Bond ETFs: A Surge in Popularity (2025)

Dan Satir, editor of Morning Star’s ETF Investor newsletter, highlighted the significant inflows into bond ETFs in 2025, with roughly 30-33% of total ETF inflows directed towards fixed income. This surge is driven by the increasing attractiveness of bond yields (around 4% currently, compared to near-zero rates a decade ago) and the saturation of the stock ETF market.

Satir emphasized the role of bonds in a portfolio as a balance to stock risk, offering low correlation and lower volatility. He categorized bond ETFs into three tiers:

• Core Bond ETFs: Provide broad exposure to the bond market, offering diversification and low risk. Recommended options include Vanguard Total Bond Market ETF (BND) and iShares Core US Aggregate Bond ETF (AG), both tracking the Bloomberg US Aggregate Index with identical fees.
• Core Plus Bond ETFs: Offer slightly higher yields by incorporating some exposure to high-yield bonds, maintaining broad diversification. Fidelity Total Bond ETF (FBND), an actively managed ETF with a Gold rating, was highlighted.
• Multi-Sector Bond ETFs: Aim for higher returns by increasing exposure to various bond sectors, accepting incrementally more risk. JP Morgan Income ETF was recommended as a top choice.
• High Yield Bond ETFs: The riskiest category, offering the highest potential yields but with increased volatility and correlation to the stock market. Vanguard High Yield Active ETF was mentioned as a new option to watch, with a low expense ratio of 22 basis points.

Cover Call ETFs: Income at a Cost

Cover call ETFs, which generate income by selling call options on underlying assets, have gained popularity due to their high yields. However, Satir cautioned that “not all yield is good,” as this strategy caps potential upside growth. Investors trade potential price appreciation for income today. These are not ideal for long-term accumulation phases.

JP Morgan Equity Premium Income ETF (Jeppy) was identified as a solid choice, earning a Bronze rating. Its advantages include a relatively low expense ratio (35 basis points), a focus on S&P 500 stocks, a defensive portfolio construction, and a strategy to minimize tax burdens. The ETF sells slightly out-of-the-money call options and utilizes equity-linked notes to manage tax implications.

Logical Connections & Synthesis

The discussion progresses from lower-risk dividend and bond ETFs to higher-risk cover call ETFs, illustrating a spectrum of income-generating strategies. The common thread throughout is the importance of understanding the trade-offs between risk and reward. Each segment emphasizes the need for diversification, low costs, and careful consideration of individual investment goals and risk tolerance.

The experts consistently highlight the importance of fees, with Vanguard often cited for its low-cost offerings. The discussion also underscores the evolving landscape of ETFs, with asset managers responding to investor demand by creating new and innovative products.

Main Takeaways:

• Diversification is key: Across all ETF categories, diversification is crucial for managing risk.
• Fees matter: Low expense ratios can significantly impact long-term returns.
• Understand the trade-offs: Each ETF strategy involves trade-offs between risk, reward, and potential growth.
• Align with your goals: Choose ETFs that align with your individual investment objectives and risk tolerance.
• Bond yields are attractive: Bond ETFs are experiencing a surge in popularity due to rising interest rates.
• Cover call ETFs offer income, but cap growth: Be aware of the limitations of cover call strategies.