ETRACS, the ETF brand from the Switzerland-based bank UBS, has
already made waves in the multi-asset space. After launching a
multi-asset ETN -
ETRACS Diversified High Income ETN
(DVHI) - in September, this issuer of exchange traded products has
now unveiled a leveraged form of the same note. The new product
will trade under the name of
ETRACS Monthly Pay 2xLeveraged Diversified High Income ETN
Multi asset ETFs - focused on investing in a blend of diverse asset
classes such as investment grade and high yield bonds, stocks,
preferred stocks, REITs and MLPs -have caught investor attention
lately thanks to the erratic movements in the global economy in the
past few months. The market is likely to stay volatile in the
coming months as well mainly due to ongoing speculations over taper
timing and its impact on interest rates and key stock markets.
The product is capable of safeguarding investors against excessive
fluctuations in the market and offering capital appreciation while
lowering downside risks by investing in a pool of assets that are
not highly correlated. Also, endowing investors with a very high
level of current income by adopting a double-leverage approach is
another purpose of the product (read:
Senior Loan ETFs: The Best Bet for Rising
DVHL in Focus
This new note looks to offer investors two times monthly resetting
exposure to the NYSE Diversified High Income Index. The index
consists of a diversified portfolio of 138 high income-generating
securities around the world that historically pay significant
dividends or distributions.
The product anticipates paying out roughly 13.63% in yield a year
to investors, indicating its heavy focus on income. In terms
of equity sector allocation that covers almost 60% of the fund,
business development companies and energy MLPs take up the top
chunk each getting 15% share. Another asset class fixed income
including preferred stocks, emerging market bonds, high yield bonds
and muni bonds accounts for 10% of share each.
Investors should also note that the product is structured as an ETN
which carries an associated risk of the issuer's credit worthiness,
though this should be a minor consideration.
How does it fit in a portfolio?
The investors looking for a broad income play across the asset
classes may want to consider this product. Dividend ETFs have
gained popularity in recent years owing to the rock-bottom interest
rate scenario currently prevailing in the market.
and funds fall out of favor in a rising rate environment mainly
during taper concerns, dividend investing is still a wise bet. This
is due to the fact that historically as much as 40% of market
returns came from dividends.
And when it comes to dividend investing, MLPs and REITs steal the
show as these firms must pay out at least 90% of their earnings to
holders for favorable tax treatment (read:
3 ETFs that Maximize Shareholder Value
Moreover, due to the monthly resetting nature of this leveraged
ETN, the product may prove ideal for the medium-term investors who
can avoid extreme volatility faced from the products having daily
resetting nature (read:
Time to Buy Floating Rate ETFs?
Can it succeed?
In terms of competition, the multi-assets high-yield space has a
great deal of products striving for investor money. Some of the
most impressive competitors include the
Guggenheim Multi-Asset Income ETF
First Trust Multi-Asset Diversified Income Index
iShares Morningstar Multi-Asset Income Index
. All three have at least $100 million in assets under management
with CVY leading the pack with around $750 million in assets
accumulation, so far.
From the yield point of view, the trio offers yields of 5.43%,
5.87% and 2.38% respectively (as of November 13, 2013). This is the
area in which DVHL is likely to outperform its high-yield cousins.
An add-on 2x leverage to an already high-income ETN might entice
yield-seeking investors going forward and can provide DVHL an edge
over most of its counterparts.
The new ETRACS product could attract considerable interest from
traders not having a long-term view. A decent level of capital
appreciation and current income can be expected from the product
despite global market uncertainty. Just remember, leveraged
products can be quite risky, so make sure to have a strong stomach
before consider this new high income ETN.
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E-TRC DIV HI IN (DVHI): ETF Research Reports
ISHARS-MO MA (IYLD): ETF Research Reports
FT-NDQ MA DIIF (MDIV): ETF Research Reports
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