Take a look at this amazing chart of a security with a 14%yield
andshares that rose more than 40% in less than four months.
This security is not a common stock. It's not a closed-end fund.
It's not an master-limitedpartnership (
MLP
), a real-estate investment trust (REIT), aroyalty trust or
apreferred stock . It's not any high-yieldasset class I usually
talk about in my articles.
It's
E-TRACS 2xLeveraged Long Wells Fargo Business Development
Company ETN (NYSE:
BDCL
)
-- an exchange-traded note (
ETN
).
Exchange-traded products, including funds (ETFs ) and ETNs, are
not the first securities to come to mind when you're searching for
yield.
And while the most populardividend ETFs such as
Vanguard DividendAppreciation ETF (NYSE:
VIG
)
,
iShares Dow Jones Select DividendIndex (NYSE:
DVY
)
and
SPDR S&P Dividend (NYSE:
SDY
)
carry puny yields of 2%-3%... if you go off the beaten path, then
you can find 10%-plus yields and market-beating returns.
Just look at these 11 exchange traded products I found using the
free online screening tool etfdb.com.
Let me warn you, yields such as these don't come risk-free and
returns can be volatile. BDCL had a fantastic four-month run, as
the chart above shows. But the shares dropped by almost the same
amount in about two months last year, far steeper than the decline
of the S&P 500 during the same time.
Not to worry though. By asking a few simple questions, you can
find the best balance between risk and long-term reward potential
when it comes to exchange-traded products:
1. Is the product an ETF or an ETN?
2. Are the shares actively traded?
3. Is the fund leveraged or unleveraged?
1. Is the product an ETF or an ETN?
The first two products on the list are ETNs. The rest are ETFs.
There's a world of difference between ETNs and ETFs. ETFs give you
an equity stake in the fund's underlying portfolio. ETNs are debt.
They're aliability for the company and a promissory note to
you.
There'scredit risk with ETNs that you don't have with ETFs, but
another risk is their complexity. ETNs have amaturity date . You
can buy and sell an ETN daily, but its price is affected by
expected returns at maturity.
If you hold an ETN to maturity, then you don't simply get back
yourprincipal , as with abond . Your returns, if any, are
impossible to predict. They're a function of index performance and
the principal value of the note, less management expenses.
In contrast, the returns on ETFs tend to be more
straightforward. The share price mostly moves in tandem with
thebenchmark index.
2. Are the shares actively traded?"
Right now, a lot more funds flow into ETFs than ETNs, so thin
trading volumes could make it harder to get an attractive buy or
sell price.
BDCL trades about 40,000 notes a day. By comparison, an ETF such
as
iShares FTSE NAREIT
Mortgage
Plus (NYSE:
REM
)
, carrying a rich 12% yield, trades more than a million shares on
an average day.
That said, smaller ETFs such as
Columbia Concentrated Large Cap Value Strategy Fund (NYSE:
GVT
)
, with only 100,000outstanding shares , also can trade at very low
volumes.
3. Is the fund leveraged or unleveraged?
Some ETNs such as BDCL amplify exposure to the returns of their
benchmark index by using leverage. As a "double long" ETN, BDCL
seeks to double the daily investment performance of its index. But
the risk is also twice as much. If the index falls, then BDCL could
double its losses.
It's important to note that leveraged funds that make big bets
on a sector can be highly volatile. Low trading volumes can
exacerbate the volatility.
Risks to Consider:
Of course with investing, nothing is guaranteed. The metrics
used in my analysis are based on historical trends. There is
noguarantee that history will repeat itself.
Action to Take -->
But that said, when you're looking for high-yield exchange traded
products, it's best to find one with a healthy blend of high yield,
good tradingvolume , and low volatility.
Of the 11 exchange-traded products listed above, the one with
the best mix is
FTSE NAREIT Mortgage Plus
. If you're seeking greater exposure to the mortgage REIT sector,
including
American Capital (Nasdaq:
AGNC
)
and
Annaly (NYSE:
NLY
)
, which together account for 40% of REM's portfolio, this fund is
worth a second look.
-- Carla Pasternak
[Note: Have you had a chance to look at my research team's
recently released report, "The 10 Best Retirement Savings Stocks?"
These 10 stocks offer a safe income stream and yield up to 15%. Go
here to learn more.]
Carla Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.