5 Uptrending ETFs Yielding Dividends Of 8% To 14%

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About 10,000 baby boomers are celebrating their 65th birthday everyday in the U.S., and that's expected to continue for at least two decades. With so many people retiring in an era of low interest rates, the search for income-paying assets is more crucial than ever.

Here's a look at five exchange traded funds with the fattest yields that are also trading above their 200-day moving averages, confirming an uptrend.

But there's no free lunch. Dividends aren't guaranteed and these ETFs charge rather high management fees. Along with each ETF's basic information, we've listed its correlation to the S&P 500, beta and maximum drawdown, or loss from peak to trough, to gauge their investment risks.

"To the extent investors are attracted to a high-dividend ETF with attractive yields, they not only need to look at the risk/return characteristics of the ETF, but how it correlates to other sectors," Jonathan Lewis, chief investment officer at Samson Capital Advisors with $7.1 billion in assets under management in New York, said in an email. "An ETF can have a very high dividend, but if it is very volatile, or has the capacity for large drawdowns, an investor also has to consider their outlook for the sector."

Correlation, measured on a scale of -1 to +1 indicates how much the ETF moves in sync with the S&P. A -1 would be inverse correlation, or it moves exactly opposite the S&P, while +1 means perfect correlation, or it moves exactly the same as the S&P. The closer the ratio is to 0, the more independent it moves relative to the S&P.

Beta measures how volatile the ETFs are compared with the stock market . The higher above 1, the more it swings compared with the market and greater potential for losses and gains. The lower the beta, the more steady the share price. Wild price swings and deep drawdowns could wipe away all the benefit of dividend income.

1. UBS E-TRACS 2x Wells Fargo Business Development Company ETN ( BDCL )

12-month yield: 14%

2013 return: 33%

Expense ratio: 0.85%

Correlation to SPDR S&P 500 ( SPY ) since inception: 0.8

Beta: 1.62

Maximum drawdown since inception: -45%

BDCL is the double-leveraged version ofETRACS Wells Fargo Business Development Company Index ETN ( BDCS ), which pays dividends quarterly. The underlying index includes 32 companies fronted byAmerican Capital ( ACAS ),Ares Capital ( ARCC ),Prospect Capital (PSEC) andApollo Investment (AINV), which together account for about 40% of assets.

Because BDCL is structured as an exchange traded note -- rather than a mutual fund like most ETFs -- investors must consider the issuer's credit quality. Share prices could swing because changes in the issuer's corporate outlook or credit rating. ETNs are debt notes that are artificially linked to the underlying index but don't actually hold any of the stocks. Investors risk losing all of their money if the issuer fails to pay its debts.

Business development companies are publicly traded, private equity or venture capital firms that invest in small- and midsize companies by lending money and/or buying a controlling interest. They're structured similar to real estate investment trusts, or REITs. They pay no corporate income tax and have to distribute at least 90% of their taxable income to shareholders as a dividend.

BDCs can thrive in a rising-rate environment because they borrow money at a fixed rate and lend it at a floating rate, says Grier Eliasek, president ofProspect Capital , a New York-based BDC with $5 billion in assets under management. Currently regulations limit a BDC's debt-to-equity ratio to 1 but legislation is pending in Congress to double that limit, which is still well below the 10 times debt-to-equity leverage limit for banks, he said in an email. The increased borrowing limits would give BDCs the potential to expand return on equity ratio and dividend payouts by borrowing more money.

2. PowerShares Global Listed Private Equity (PSP)

12-month yield: 13.6%

2013 return: 38%

Expense ratio: 2.19%

Correlation to SPY: 0.9

Beta: 1.05

Maximum drawdown: -88%

PSP contains 64 private equity firms from 10 countries led byOnex (OCX),Partners Group Holdings (PGHN),3i Group (III) andWendel (MF). It includes BDCs and master limited partnerships, or MLPs, and other companies that invest in and service privately held companies.

"2013 was a great year for global private equity, thanks mainly to rising stock markets, low interest rates and investor appetite for risky investments," Neena Mishra, ETF research director at Zacks Investment Research in Chicago, said in an email. "If the stock market continues its uptrend and interest rates do not rise sharply, then the private equity market can maintain its positive momentum though probably not at last year's pace."

3. Yorkville High Income MLP (YMLP)

12-month yield: 8.9%

2013 return: 16%

Expense ratio: 0.82%

Correlation to SPY: 0.7

Beta: 0.36

Maximum drawdown: -45%

This ETF is structured as a C-Corporation rather than a mutual fund like most ETFs. That means the ETF has to pay corporate taxes, which erodes its return, writes Ron Rowland, founder of InvestWithAnEdge.com .

MLPs are toll-road type businesses that pipe, store and process natural gas and oil.

"We're in the midst of the North American energy revolution and these are critical to that revolution," said Lowell Miller, president Miller Howard Investments in Woodstock, N.Y., with $6.2 billion in assets under management. MLPs profits depend on production volume regardless of energy prices.

"MLPs displayed a remarkable resilience when many other income focused assets suffered steep losses as a result of the 'taper' talk. They may hold up well this year as well," Mishra wrote. "MLPs in general have relatively consistent and predictable cash flows, unlike exploration and production (E&P) companies, whose profits are highly correlated with commodity prices."

MLPs are similar to REITs as they don't pay corporate income taxes and have to pay their shareholders, or partners, a quarterly distribution. Tax treatment for MLPs is complicated and so an ETF or ETN is best for individual investors.

4. AdvisorShares Peritus High Yield (HYLD)

12-month yield: 7.9%

2013 return: 12%

Expense ratio: 1.25%

Correlation to SPY: 0.6

Beta: 0.19

Maximum drawdown: -15%

Santa Barbara, Calif.-based Peritus Asset Management actively manages this ETF, which invests in high-yield corporate bonds rated noninvestment grade, by ratings agencies, primarily Moody's and Standard & Poor's.

Peritus looks for issuers in which company insiders are buying shares, underscoring management's confidence in the company. As contrarians, Peritus looks for bonds that are out of favor for "wrong or temporary reasons," Tim Gramatovich, chief investment officer at Peritus, wrote in a white paper. It then conducts fundamental and credit analysis on the companies and monitors the earnings.

Bonds in the portfolio have an average coupon of 9% and about three years to maturity. Prices for short-duration bonds are less sensitive to interest rate changes than long-term bonds, making short-term bonds less risky in a rising rate environment, Mishra says.

Although HYLD ranked No. 1 in its Morningstar fund category the past two years, it was dead last in 2011.

5. PowerShares KBW High Dividend Yield Financial (KBWD)

12-month yield: 7.7%

2013 return: 18%

Expense ratio: 1.48%

Correlation to SPY: 0.8

Beta: 0.88

Maximum drawdown since its December 2010 inception: -25%

KBWD holds 39 stocks including REITs, brokerages, insurers, banks and other financial firms. Mortgage REITs account for nearly a third of assets, asset management firms 26% and regional banks 13%.

Bank profits and revenue are increasing as they make more loans in a strengthening economy. At the same time their profit margins stand to widen as long-term interest rates -- at which they lend -- rise while short-term rates -- at which they borrow -- remain low, says Sam Subramanian, chief investment officer of Alpha Profit Investments in Sugar Land, Texas.

He added: capital market firms are seeing increased merger-and-acquisitions activity. Asset managers are enjoying fattening management fees as assets swell from investor inflow and rising stock prices. Brokerage firms are cashing in on rising trading volume.

"Mortgage REITs are highly sensitive to interest rates and many of them got slammed last year on taper fears," Mishra wrote. "Regional banks, asset managers and property and casualty insurers in the portfolio are likely to perform well in the rising (interest) rate environment."

Follow Trang Ho on Twitter @IBD_THo .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: ACAS , ARCC , BDCL , BDCS , SPY

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