Although markets have been shaky as of late, ETF providers are
diving head first into new products. A host of fresh funds have
hit the market recently, targeting a variety of new market
segments in the process.
There has even been a new ETF provider launching its first
fund, YieldShares, in this time frame. This company, led by
former Claymore Securities veteran Christian Magoon, is now
stepping into the spotlight in the extremely competitive yield
space with their brand new
High Income ETF (YYY)
Obviously, this is a tough time to launch a yield-focused ETF,
as Fed policies have dulled the appeal of some income securities,
as investors cycle away from this asset class for the time being.
Yet with that being said, there are a few key aspects to YYY
which could make the fund an interesting choice regardless of the
broader market environment.
YYY in Focus
This new ETF looks to track the ISE High Income Index, a
benchmark of 30 closed-end funds (CEFs) that seek to provide
investors with high current monthly income levels. CEFs are
included within the benchmark when they rank the highest overall
on three key metrics; yield, discount to net asset value, and
Two Unconventional Sources of ETF Yield
Currently, this results in a benchmark that has an indicated
yield of 10.3%, and an average CEF discount of 7.6%,
to the ISE index page
. Equity CEFs make up just over half the portfolio, while debt
accounts for a quarter of the assets, giving the overall duration
level a reading of 1.4 years, putting it decidedly at the low end
of the curve.
Top ranked CEFs receive the greatest weight, while the lowest
ranked funds receive the smallest weighting. However, the biggest
holding is capped at 4.25%, in order to prevent concentration
issues and spread assets around the 30 index constituents.
Closed-End Funds 101
For investors unfamiliar with closed-end funds, it is probably
helpful to note some of the basics about the space. First off,
CEFs were the precursor to open-ended mutual funds, having made
their debut in the mid 1890's.
These products raise a fixed amount of capital, and then
invest it in a variety of securities. Investors can then buy or
sell these CEFs shares on the open market, though unlike
or even many mutual funds, no new shares are created or redeemed
ETFs vs. Mutual Funds
Without this creation/redemption process, closed-end funds can
deviate significantly from their net asset value (NAV). Add in
the fact that these are usually less traded than their ETF
counterparts, and a discount to NAV usually develops for
This means that CEFs often trade at level that is below what
their net asset value is worth, hence the terminology of 'trading
at a discount'. Still, many of these closed-end funds have income
strategies and can make it easier for some to tap into
little-appreciated or extremely illiquid techniques.
So by putting this approach in an ETF structure,
investors can potentially obtain the best of both worlds; the
liquidity of the ETF along with the income and diversification of
The main competitor to YYY is the established PowerShares CEF
Income Composite Portfolio (
). This product also focuses in on closed-end funds, and it has
already seen a great deal of interest from investors, as
evidenced by its $450 million in assets under management (also
Closed End ETFs for Forgotten 7% Yield?
The product is a bit pricier than YYY though, as it has an
expense ratio of 1.73% (with a management fee of 50 basis points)
compared to an expense ratio of 1.65% for the YieldShares product
(also with a 0.50% management fee). It does also hold more CEFs
than its new counterpart, holding over 140 in total.
This suggests that PCEF may be a broader play on the space,
and thus a more well-rounded choice for the CEF market. However,
the SEC 30 Day Yield is just below 8%, so there is a bit of a
sacrifice on the income front for this broader exposure.
Income investing has been quite rough lately, as a possible
shift in Fed policies has dulled the appeal of high yield stocks.
Still, there are plenty of decent options out there to generate
income with lower risks, especially when you look to lower
duration securities (see
What Does Your Income ETF Focus On?
One little known way to do this is by targeting CEFs, which
can not only provide investors with high rates of income, but can
have ultra-low durations as well. When you add in a focus on CEFs
trading at a discount to NAV, you may have a winning combination
with this strategy, especially in today's type of market.
So while competition may be fierce in the income ETF world,
YYY is definitely worth a closer look. The product takes a novel
approach to income investing, which just may be the technique
investors need to use in this uncertain economic environment.
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PWRSH-CEF ICP (PCEF): ETF Research Reports
YLD SHS-HI INC (YYY): ETF Research Reports
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