High-Yield ETFs vs. Traditional Dividend ETFs: Is a 9.7% Yield Worth the Risk?

The debate between high-yield ETFs and traditional dividend ETFs has intensified as investors seek income in a low-growth environment. While a 9.7% yield from a high-yield ETF like the Invesco KBW Premium Yield Equity REIT ETF (KBWY) appears enticing, the trade-offs in risk-adjusted returns and dividend sustainability demand closer scrutiny. This analysis evaluates whether such high yields justify the added risks, drawing on recent performance data, historical volatility, and sustainability metrics.

Risk-Adjusted Returns: A Tale of Two Strategies

High-yield ETFs, such as KBWY, have historically offered eye-catching yields but often at the expense of risk-adjusted returns. As of Q4 2025, KBWY's 1-year Sharpe ratio stood at -0.67, indicating poor risk-adjusted performance, while traditional dividend ETFs like the Schwab U.S. Dividend Equity ETF (SCHD) and Vanguard Dividend Appreciation ETF (VIG) posted Sharpe ratios of 0.25 and 0.35, respectively. Over longer horizons, KBWY's 5-year Sharpe ratio of 0.22 still lags behind SCHD's 0.62 and VIG's 0.71.

This disparity reflects the inherent volatility of high-yield strategies. KBWY's focus on small- and mid-cap REITs, while generating a 9.89% yield, exposes investors to sectors with weaker balance sheets and earnings stability. In contrast, traditional ETFs like SCHD prioritize companies with consistent dividend growth and conservative payout ratios (56% on average), balancing income with capital preservation.

Dividend Sustainability: Quality Over Quantity

Dividend sustainability is where traditional ETFs shine. SCHD's holdings, for instance, have maintained a 5.8% annual dividend growth rate through 2025, while VIG's 4.6% average annual growth over six years underscores its focus on long-term compounding. These ETFs emphasize firms with strong return on equity (ROE) and low leverage, ensuring dividends are supported by earnings rather than aggressive financial engineering.

High-yield ETFs, however, often rely on aggressive payout ratios that leave little room for error. KBWY's 9.89% yield, for example, is underpinned by REITs legally required to distribute 90% of their income, but this structure does not guarantee earnings stability. During the 2020 pandemic, KBWY's maximum drawdown of -57.68% far exceeded SCHD's -33.37%, highlighting its vulnerability during economic stress. Similarly, in 2008, KBWY's annualized return of 2.11% paled next to SCHD's 12.16%.

Historical Performance: Lessons from Downturns

The 2008 financial crisis and 2020 pandemic offer critical insights. During these periods, traditional dividend ETFs demonstrated resilience: VIG fell by -26.75% in 2008 while SCHD dropped -33.51%. In contrast, KBWY's drawdowns were far steeper, reflecting its exposure to cyclical sectors. High-yield ETFs like the Global X SuperDividend ETF (DIV) also struggled, with a 3-year Sharpe ratio of 0.09 in late 2025, underscoring their inability to deliver consistent returns during volatility.

The 9.7% Yield Dilemma

A 9.7% yield, such as KBWY's 9.89% appears attractive, may seem attractive, but it comes with caveats. First, high yields often signal underlying risks-such as weak earnings or overleveraged companies-that can lead to dividend cuts. Second, the sustainability of such yields is questionable during downturns, as evidenced by KBWY's -57.68% drawdown in 2020 during the pandemic. Traditional ETFs, while offering lower yields (SCHD at 3.83%, VIG at 1.70% in comparison), provide a buffer against economic shocks through diversified, high-quality holdings.

Conclusion: Balancing Income and Risk

For income-focused investors, the choice between high-yield and traditional dividend ETFs hinges on risk tolerance. High-yield ETFs like KBWY offer alluring yields but expose investors to significant volatility and sustainability risks. Traditional ETFs, while yielding less, prioritize long-term stability and compounding-a critical advantage during economic downturns. As markets remain uncertain, a diversified approach that blends both strategies may offer the best balance, but investors must weigh the potential rewards of high yields against the costs of instability.