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
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
. 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
12-month yield: 14%
2013 return: 33%
Expense ratio: 0.85%
SPDR S&P 500
) since inception: 0.8
Maximum drawdown since inception: -45%
BDCL is the double-leveraged version ofETRACS Wells Fargo
Business Development Company Index ETN (
), which pays dividends quarterly. The underlying index includes
32 companies fronted byAmerican Capital (
),Ares Capital (
),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
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
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
"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
Yorkville High Income MLP (YMLP)
12-month yield: 8.9%
2013 return: 16%
Expense ratio: 0.82%
Correlation to SPY: 0.7
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.
AdvisorShares Peritus High Yield (HYLD)
12-month yield: 7.9%
2013 return: 12%
Expense ratio: 1.25%
Correlation to SPY: 0.6
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
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
Although HYLD ranked No. 1 in its Morningstar fund category
the past two years, it was dead last in 2011.
PowerShares KBW High Dividend Yield Financial (KBWD)
12-month yield: 7.7%
2013 return: 18%
Expense ratio: 1.48%
Correlation to SPY: 0.8
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
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
"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."
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