Why investors should tread carefully with income ETFs

When investing in funds managed by professional investors performance figures tend to significantly vary from the best to the worst in a particular sector over a certain time frame.

Investors hope they will be backing a fund manager who adds value by outperforming an index, but there are no guarantees the fund will deliver, and the reality is that many underperform the index.

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In contrast, with a passive fund – an index or exchange-traded fund (ETF) – investors know what they are getting, which is the return of the index minus (in most cases) a small yearly fee. There are a number of options charging less than 0.15% a year (£15 on a £10,000 investment) that provide exposure to the UK and US stock markets.

Cost is one of the most important considerations when sizing up passive funds. However, the charge should not be viewed in isolation. While there’s many passive funds purporting to do the same thing – such as investing in UK companies – the range of returns can be stark due to the index they are aiming to mirror.

Global equity income ETFs are a good example of funds that have wide variations in returns. The below data, sourced from FE Fundinfo, shows the best performer over the past five years is up 80.6% versus 46.7% for the worst performer.

The reason why returns differ across the five global equity income ETFs is due to a lack of consensus over how to construct dividend-paying indices.

Since there are numerous ways to approach it (for example, filtering based on yield or dividend track record), a range of indices are used by global income ETFs. Some passive firms have even designed their own.

Many indices use a quality screen to avoid potential value traps (shares with high yields that look unsustainable). However, this can lead to very different stocks versus an index that is filtering for dividend growth or high dividend yields.

• What are the cheapest ETFs to track global markets?

Source: FE Analytics. Data to 18 September 2026. Past performance is not a guide to future performance.

Top of pile over all three time periods examined is Vanguard FTSE All World High Dividend Yield ETF. It follows the ups and downs of the FTSE All-World High Yield Index, which comprises more than 2,300 large and mid-cap stocks with higher-than-average dividend yields. Its yield is 2.4%.

Second in our table – Fidelity Global Quality Income ETF –  invests in large and medium-sized businesses that “exhibit quality fundamental characteristics”. It tracks the up and down fortunes of around 240 companies. Its yield is low, at 1.7%, with growth-focused companies dominating its top 10 holdings, with NVIDIA Corp (NASDAQ:NVDA), Apple Inc (NASDAQ:AAPL)and Alphabet Inc Class A (NASDAQ:GOOGL) its top three holdings 

However, there’s a sizeable gap between its five years gains and another ETF that also adopts the same “quality” style: WisdomTree Global Quality Dividend Growth. Its focus is on “high quality, dividend growing companies from global developed markets which meet WisdomTree’s ESG (environmental, social and governance) criteria.” It has 600 holdings, with Apple, Microsoft Corp (NASDAQ:MSFT) and AbbVie Inc (NYSE:ABBV) its top three holdings. The yield is also low, at 1.7%.

In third is another product with a quality focus, Franklin Global Quality Dividend UCITS ETF GBP. It differs in going much more beyond developed markets, with sizable exposure to Asia Pacific, comprising 16.3% of the ETF. It also holds 5.7% in Australia/New Zealand, and 4.2% in Middle East/Africa. Its yield is 3.8%.

Bottom of the pile over five years is SPDR® S&P Global Dividend Aristocrats ETF . It tracks the performance of 90 high-yielding stocks that have maintained or increased their dividends for at least 10 consecutive years. It has some exposure to emerging markets. In contrast to the quality-focused ETFs there’s very little weighting to tech stocks, with utilities, financials and real estate favoured. Those three sectors collectively account for just over half of the ETF, which is much higher than the amount held by the high-quality focused ETFs. Its yield is 3.8%.  

Overall, the key takeaway is that with so many different ways to construct an equity income index, investors need to be aware what they are actually buying.