Closed-end funds can also boost yields by using leverage. In a typical arrangement, a fund might raise $100 million from investors and use the cash to buy bonds. Then the portfolio manager borrows another $30 million against the assets. The manager takes the proceeds of the loans and buys more bonds.
PowerShares compensates for the risks of leverage by investing in a wide collection of 126 closed-end funds. The list of holdings includes high-quality foreign bonds, taxable municipals, and mortgage-backed securities. Top holdings include AllianceBernstein Income (ACG - Get Report), Aberdeen Asia-Pacific Income (FAX) and BlackRock Build America Bond (TLT).
The iShares Multi-Asset ETF also holds an unusually wide portfolio. The fund invests in a collection of other income ETFs. About 30% of assets are in equities, while the rest is invested in fixed income. The iShares fund owns Treasuries, mortgage securities, and foreign bonds. Holdings include iShares JP Morgan Emerging Market Bond, iShares FTSE NAREIT Mortgage ETF, and iShares Barclays 20-Year Treasury.
Tracking a Morningstar index, the multi-asset ETF adjusts holdings as market conditions change. According to a set of rules, the allocation to an asset could be reduced as the yield becomes less appealing in relation to the risk. About 20% of assets are in iShares iBoxx High Yield Corporate Bond. In the current environment, the multi-asset ETF will continue to have a big allocation to high-yield bonds, says Morningstar portfolio manager Brian Huckstep. "High-yield bonds have good yields now and good risk-return tradeoffs," he says.
The iShares multi-asset fund began operating last April, and it has already attracted $86 million in assets. If the fund can continue delivering rich yields, more investors will take notice. At the time of publication the author held no positions in any of the stocks mentioned. Follow @StanLuxenberg This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.