The recent rumble on Wall Street coupled with looming fears over rising interest rates has prompted many investors to re-examine their portfolios. More specifically, investors who rely on the current income stream from their portfolios have likely been thinking of prudent ways to more favorably re-position their holdings over the coming months. We recently had an opportunity to talk with David Fabian, a managing partner at FMD Capital Management. whose firm specializes in actively managed ETF portfolios.

David offers his insights below on how investors can utilize ETFs to build an income portfolio [see our List of ETF Friendly Advisors ]:

ETF Database (ETFdb):  What are the key components of a successful income portfolio?

David Fabian (DF):  A successful income portfolio is made up of multiple asset classes that include: dividend paying equities, fixed-income, and alternative income strategies.

Most ETF income portfolios for retired or conservative investors are centered on core holdings in bonds because of the dependable dividends and reduced price swings. I tend to favor actively-managed funds such as the PIMCO Total Return ETF (BOND ) which carries a wide array of treasury, mortgage, and corporate debt of both developed and foreign nations. I like that active managers have the ability to control their sector allocations, duration, and credit profile to seek alpha. You can then subsequently overweight your fixed-income exposure in tactical sectors such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB ) or iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD ) to enhance your returns [see also 101 High Yielding ETFs for Every Dividend Investor ].

The dividend paying equity side of the portfolio is designed to provide market correlation along with inflation fighting effects over time. The Vanguard High Yield Dividend ETF (VYM ) is a favorite core holding that includes a broad array of nearly 400 stocks with strong dividend histories. One of the reasons I like this ETF is that it has an overweight allocation to technology stocks such as Apple Inc (AAPL ), which has become a heavy weight in the dividend world and still offers excellent growth potential.

Lastly, the alternative sleeve of a successful ETF income portfolio provides exposure to REITs. MLPs. and preferred stocks. The Vanguard REIT ETF (VNQ ) and iShares U.S. Preferred Stock ETF (PFF ) are two examples of alternative strategies that offer above-average yields and access to non-traditional asset classes. These are often overlooked by investors that are focused solely on common stocks and bonds.

ETFdb:  Why does diversification play such a key role in this strategy?

DF:  A diversified approach helps to minimize the risk of being overly concentrated in one asset class, increase the overall yield of the portfolio, and generally offers lower volatility.

By focusing exclusively on just one aspect of the income-generating world, you put all your eggs in one basket, which can lead to inconsistent returns. Conversely, spreading your money among a variety of sectors and strategies allows your portfolio to reap the benefits of non-correlated returns and steadier price action.

Alternative assets in particular are one area that can offer much higher yields and price trends that don’t directly correlate with stocks or interest rates. This provides a counterweight to your core equity and bond exposure, while still offering consistent income streams.

ETFdb:  With so many income-oriented ETFs available, how do you decipher the best funds in each category?

DF:  Dissecting the numerous ETFs available to income investors can be a tedious task. However, it is made much simpler with free tools from websites such as ETFdb.com to sort through the various options [see Complete List of Dividend-focused ETFs ].

Below are some of the previously mentioned ETFs, and a few others as well, along with their respective yield and year-to-date returns (data as of 10/15/2014):