This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

An ETF Strategy That Delivers Rich Yields

NEW YORK ( TheStreet ) -- To reach yield-starved investors, exchange-traded fund companies have introduced portfolios that invest in closed-end funds -- funds that have a fixed number of shares and trade like a stock.

One of the highest yielding ETFs is YieldShares High Income (YYY), which yields 8.8% and has stakes in 30 closed-end funds. PowerShares CEF Income Composite (PCEF) yields 7.6%, while Market Vectors CEF Municipal Income (XMPT) delivers a tax-free yield of 6%.

Though the yields are tempting, keep in mind that closed-end funds can be volatile. During market downturns, closed-end funds have often lost more than traditional mutual funds.

Because they deliver rich yields, closed-end funds have long been favorites of income investors. Like mutual funds, closed-end funds hold portfolios of stocks or bonds. But closed-end funds can trade at discounts or premiums to the value of the assets in their portfolios.

In contrast, mutual funds always trade for their net asset values. In recent years, closed-end funds have traded at average discounts of 4%. So investors have been able to purchase $1 of assets for 96 cents. The discounts boost the yields that investors can get from closed-ends.

Many closed-end funds increase their yields by using leverage. A typical fund might assemble a portfolio of $100 million in bonds. Then the portfolio manager would borrow $30 million against the assets and buy more bonds. That way the fund would collect income from $1.30 worth of assets for each $1 invested. While leverage increases gains in rallies, it can also magnify losses in downturns.

Leverage provides an important boost to closed-end municipal funds, says Jim Colby, senior municipal strategist of Market Vectors. Colby says that many of the municipal funds hold long-term BBB-rated bonds, which yield 5%. The closed-end funds can enhance the yield by a percentage point or more because of discounts and leverage.

For someone in the top tax bracket, the 6% tax-free yield of the Market Vectors ETF is comparable to a taxable bond that yields more than 9%. "The yields of closed-end municipals are extremely attractive compared to Treasuries or other taxable bonds," Colby says.

The PowerShares ETF holds a diversified basket of income funds, including many closed-ends that trade for discounts of more than 5%. The approach delivered healthy results in 2013, returning 4.8%, compared with a loss of 2% for the Barclays Capital U.S. Aggregate bond index.


1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
YYY $21.12 -0.33%
PCEF $23.70 -0.25%
AAPL $130.12 0.12%
FB $82.44 2.48%
GOOG $540.31 0.21%

Markets

DOW 18,076.27 +64.33 0.36%
S&P 500 2,114.07 +4.47 0.21%
NASDAQ 5,099.2310 +22.7070 0.45%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs