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June 24, 2013
Ron DeLegge, Editor

Can a new ETF introduced by Yield Shares capture the fancy of income investors?

This is not an easy feat. It's like trying to please the Queen when she's in a bad mood. Yet, oddly, some of the most popular dividend oriented ETFs like the iShares Dow Jones Select Dividend Index ETF (NYSEARCA:DVY) and the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) carry yields south of 4%.

That leaves open plenty of opportunities for an enterprising investment firm to come up with something really juicy and daring in the yield department.

The Yield Shares High Income ETF (NYSEARCA:YYY) certainly has all the ingredients that a demanding yield hungry nation could want. It sports a yield almost four times that of 10-year U.S. Treasuries (NYSEARCA:IEF) and itís got a name so easy to remember that even a cave man can do it.

Before we examine how YYY compares to its nearest competitor, the PowerShares CEF Income Composite Portfolio (NYSEARCA:PCEF), lets evaluate the basics.

Yield Shares, the firm, is run by ETF veteran Christian Magoon. He spent years in the trenches at Claymore Securities (now owned by Guggenheim Investments) and helped give birth to 50 ETFs.

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YYY, the ETF, is the Wheaton, IL based firmís very first fund and it invests in other closed-end mutual funds (CEFs). As of last year, there were 602 CEFs and around 65% of the market consisted of bond funds. CEFs, unlike traditional mutual funds, trade on a stock exchange throughout the day.

Now letís examine YYY versus PCEF.

YYY is linked to the ISE High Income Index, which contains a basket of just 30 CEFs compared to PCEFís much larger index of 142 CEFs. Since one CEF may own hundreds (sometimes thousands) of securities, a less diluted index targeting the CEF space as YYY has done, makes better sense. Compared to YYY, PCEF is an over-diversified beast. 

What about yields?

The distribution yield for YYY has a slight advantage over PCEF of 1.72%. Thatís probably not an insignificant sum for penny pinching yield hungry types.

What about expenses?

Including the underlying acquired fund fees and expenses, YYY wins with a lower expense ratio of 1.65% compared to 1.73% for PCEF.

The asset mix for YYY is around 60% stock and 30% bond CEFs, while PCEFís investment allocation is roughly the opposite. From a volatility perspective, YYY will probably do more fluctuating versus PCEF, but we have to wait for the official stats before conclusively saying this is the case.

YYYís underlying index selects U.S. listed CEFs with a minimum $500 market cap, weighting funds based upon multiple factors such as share price to NAV premium/discount, fund average daily value of shares traded over the six-month period before the index rebalancing date, and of course, yield. All 30 holdings within YYY are capped at 4.25% to prevent any CEFs from distorting the fundís allocation with a hulk-sized footprint. The index is rebalanced annually.  

For now, the short-term trend of higher yields has taken hold.
The yield on 10-Year U.S. Treasury bonds (^TNX) has surged 31.28% over the past three months to around 2.54%. But thatís still probably not enough yield for income hogs, which might make YYY the perfect buy candidate.

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CommentsAdd Comment

Tafadzwa said on September 30, 2013
  So this is different from iivnstneg into the singapore index fund run by the Singapore Consortium. Singapore index fund is managed like a unit trust which tracks the STI. Out front fee is 2% but it so far has not paid any dividend. ETF on the other hand is not liquid enough.
Ron the Editor said on June 24, 2013
  DISCLOSURE: Paul is a Senior Advisor at IndexIQ and S-Network Global Indexes. I haven't personally met him, but he's a respected voice in the ETF industry/community. Thanks Paul for your two-cents.
paul mazzilli said on June 24, 2013
  I believe you can never have enough diversification when investing in closed-end funds (CEF). While they hold diversified portfolios each CEF trades like a stock and can have high volatility. With recent market volatility and a widening of fund discounts, PCEF has sold off and it is likely that YYY would have much greater price volatility in a similar environment. Holding only 30 securities limits YYY's ability to effectively rebalance without having market impact if it is successful in raising assets. I also note that PCEF rebalances quarterly with a focus on favoring CEFS with higher discounts while YYY will only have the ability to rebalance annually. In addition, many of the CEFs that offer the highest yield are under earning what they are paying which may result in dividend cuts or return of capital. Thus while YYY may appear to have a higher yield, it may not offer higher returns over the long run.
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