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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

16% Yield in an ETN? Is There Anything that Could Go Wrong? Well...

Stocks in this article: CEFL YYY UBS

NEW YORK (Fabian Capital Management) -- Last week I wrote about generating yield using ETFs that invest in closed-end funds. My goal was to point out innovative ways to increase the income stream in your portfolio outside of traditional high yield asset classes.

I was initially concerned that many investors would view this strategy as fraught with risk at a time when everyone is overextending themselves in the search for yield. However, the feedback that I received was shockingly in favor of taking more risk to generate an even greater yield.

Many readers pointed out that I failed to mention the ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (CEFL) as a suitable alternative for aggressive income seekers. This exchange-traded note is designed to provide two times exposure to the ISE High Income Index. This is, in fact, the same index of 30 closed-end funds that the Yield Shares High Income ETF (YYY) tracks, just without the leverage component.

CEFL is not the same as a traditional ETF that holds a basket of underlying securities. An exchange-traded note is a debt instrument issued by a bank -- in this case UBS (UBS) -- with the promise to track a specific index over a predetermined length of time. There is technically credit risk associated with investing in ETNs; however, I rate that risk very low in this case because of the high credit rating of the issuer.

CEFL was initially launched in December 2013, which happened to coincide quite nicely with a six-month period of discount narrowing and premium expansion. Many of the underlying closed-end funds were in the middle stages of emerging from correction territory in the wake of the Federal Reserve's tapering announcement in May 2013. As a result, the year-to-date returns have been fantastic. CEFL has gained 19.15% in 2014 and more than 28% in the last six months.

In addition, the current annualized yield on CEFL is listed at 16.53%, according to the fund company Web site. For perspective, the current yield on a 10-Year Treasury Note is hovering right around 2.6%. So CEFL is offering six times the yield of a credit risk-free Treasury asset based on its current distribution rate.

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