YieldShares, a new ETF provider that has Christian Magoon at its
helm, on Friday is rolling out its first ETF, an income-focused
fund-of-funds strategy that's similar to the PowerShares CEF Income
Composite Portfolio (NYSEArca:PCEF).
The YieldShares High Income ETF (NYSEArca:YYY) will invest in
about 30 closed-end funds (CEFs) with a heavy focus on equities
CEFs. The fund will have an annual expense ratio of 1.65 percent,
or $165 per $10,000 invested.
YYY is coming to market under Exchange Traded Concepts'
"ETF-In-A-Box" platform, and it amounts to the retrofitting of the
Sustainable North American Oil Sands ETF (NYSEArca:SNDS). SNDS,
which costs 0.50 percent a year, will be discontinued as part of
YYY's launch, as the strategy failed to gather assets in the 10
months since its launch.
Going into YYY's launch, SNDS has $1.2 million in assets, and
investors holding those shares will get a one-for-one share swap
Friday. The switch is designed to be a nontaxable event for
investors who own SNDS, ETC's Garrett Stevens told
It's not unusual to have an ETF provider retrofit a strategy
that's no longer economically viable in this manner, because it's
often more economical to transition the fund into a brand-new
strategy than liquidate a fund and start from scratch. And
following SNDS with a yield-producing strategy seems sensible in a
market starved for income opportunities.
Like PCEF, the new fund YYY will screen for CEFs that show high
discounts to net asset value, high distribution rates and high
liquidity. But YYY has a smaller portfolio-about a fifth the size
of PCEF's, which should provide for more focused access to
high-income-generating names, Christian Magoon said in a recent
"There's an opportunity here being missed in the income ETF
space," Magoon said at the time, arguing that the market of
is still underserved.
YYY's higher focus on equities could land YYY among the
top-yield-producing ETFs in the market as it captures more of the
source of distributions, namely equities, according to Magoon. The
fund will comprise about 60 percent equities CEFs and 30 percent
bond CEFs-roughly the inverse of the split PCEF offers. PCEF is
currently yielding about 7.6 percent.
YYY can invest in a variety of funds that own securities
including equities, taxable investment-grade bonds, high-yield
debt, municipal securities, preferred stock, convertible bonds,
commodities and REITs, among others.
Eligible holdings, picked from the entire universe of
U.S.-listed CEFs, must have at least $500 million in market
capitalization and meet minimum trading volume requirements.
The funds are then ranked based on various factors such as fund
yield; fund share price premium/discount to NAV on the index
rebalancing date; and fund average daily value of shares traded
over the six-month period prior to the index rebalancing date.
Once ranked, the top 30 underlying funds are included in the
index, and are weighted based on what the company calls a "modified
linear weighted methodology."
That essentially means the weighting scheme begins by assigning
the top-ranked security the greatest weighting in the portfolio
that equates to the multiple of the smallest weighting-in a
portfolio of 30 names, the top-weighted holding's weight will be 30
times that of the smallest.
Still, weightings are "modified" in that each constituent
weighting is capped at 4.25 percent of the overall mix regardless
of this linear scheme, the filing said.
The index, created in partnership with YieldShares, calculated
by Structured Solutions, and provided by the International
Securities Exchange, is rebalanced annually.
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