These five high-yield funds are trapped as “dumb money”


Exchange-traded funds (ETFs) broke the growth record in 2017, with inflows as high as $ 464 billion last year. The global ETF market currently has more than 4.5 trillion US dollars of assets, a large part of the attractiveness from low fees.

But many of these funds are “cheap” fees. Today we are going to discuss five investors that are attractive to investors to make the current rate of return, but later they throw back those silly money backdoors.

The dividend yield of these five funds may be good, but due to a basic flaw, the total return on these funds is also very low.

ETRACS and Wells Fargo Business Development Company Index linked to ETN
Dividend yield: 8.7%

One of the most basic requirements of exchange-traded funds is the cheap diversification they offer. With just a few basis points, you can have a basket of funds to represent any market investment you want to make – revenue, growth, industry-specific, internationalization.

However, if you and some bad players get into trouble on the market, the asset can be a detriment. Of course, commercial development companies (BDCs) are suitable.

BDCs that finance small and medium-sized businesses are similar to real estate investment trusts (REITs) because they are required to pay more than 90% of their income as dividends to their shareholders, usually with high earnings. However, there is competition and interest rate risk in this area, resulting in ETRACS being linked to the Wells Fargo Index of ETFs and outperforming its broader market since its inception, despite its high dividend yield.

Although there are some great players in this space, the fund has the highest weight among larger BDCs like Ares Capital and Prospect Capital – and their downturn has overwhelmed some of the smaller winners.

So while diversity is often worth it, the BDCs and BDCS ETFs are an unpleasant exception.

Horizon Nasdaq 100 supports subscription ETFs
Dividend yield: 7.2%

What would you say if I told you that there was a fund that would allow you to participate in the tech Nasdaq 100 index rise while enjoying defense and a 7% yield? There is a chance you will skip it.

However, when the Horizon Pacific Nasdaq 100 Support Call ETF sounds great, the devil is in the details.

QYLD is one of my favorite basic indexes Not an example of an overall strength strategy – sometimes, active management is well worth it.

In this scenario, the ETF is attempting to use the monetized revenue-generating selling strategy for investors to hold the Nasdaq 100 and trading options. This strategy allows investors to enjoy some of Nasdaq’s upside, but earnings decline when the index is flat or down.

problem? QYLD has a single permission to trade only the previous month’s options, limiting their flexibility (and therefore profitable) and limiting the NASDAQ 100 index to its individual stocks (for better premiums). So, while you might expect this strategy to underperform the PowerShares QQQ Trust NASDAQ 100 ETF in a bull market, QYLD will fall by almost half!

In the meantime, the Nuveen NASDAQ 100 Dynamic Overhead Fund – a similarly but actively managed closed-end fund – charges higher fees but basically matches what QQQ does when it travels through the cloud.

iShares American Preferred Stock ETF
Dividend yield: 5.6%

In fact, there are other market segments that get better performance by spending a few bucks a year.

I should not criticize the iShares US Preferred Stock ETF too much. After all, it’s a transformational product that helps to convert preferred stock – a steady source of income – but more difficult to research and buy on its own – due to its relatively low cost and ease of accessibility.

That is, closed-end funds can leverage leverage to magnify yields and yields, which has proven to be a better way to place a general bet on preferred stocks – even if they are not even that popular.

In other words, consider the Flaherty & Crumrine Preferred Income Fund, a closed-end fund that currently manages only $ 163 million. Why so unpopular? So the 1.34% cost ratio is not entirely attractive, while 0.47% of PFF, marketing spending between Flaherty and PFF’s parent, BlackRock, is certainly inconsistent.

However, investors who are able to handle more volatility have already gained better returns, far beyond the expense ratio. This is due in large part to management’s expertise in the preferred areas and the current 30% leverage to enable the fund to squeeze more revenue.

SPDR Barclays High Yield Bond ETF
Dividend yield: 5.6%

Counting junk bonds of the same kind on preferred and overwritten call options: The most common ETF in this space offers a cheap, appropriate performance, but you get a better return from CEF.

Consider the MFS high-yield fund, which offers a yield of 8.9%, compared with a 5.6% yield for a typical SPDR Barclays High Yield Bond ETF. The fund’s credit risk is similar with the average effective expiry time in less than a year.

It is also noteworthy that closed-end funds can provide a special exposure. In other words, you can get a “simple” rubbish exposure like a CIF, or you can find some internationally allocated funds and even mix junk bonds and other assets.

Miller / Howard High Yield Equity Fund
Dividend yield: 10.4%

Lessons learned, then: Closed-end funds far outperform exchange-traded funds, right?

Not always.

Consider the Miller / Howard High Yield Equity Fund – an all-out enticing CEF that offers a two-for-one investment through a highly diversified portfolio of master plans, real estate investment trusts and mREITs, as well as solid high yield traditional stocks Digits yield AT & T, GSK and Royal Dutch Shell.

The fund aims to provide high returns and volatility, but its portfolio options, including the exposure of MLP and REITs, undermine the latter’s goals and overall performance. But here, the ETF world shines. The PowerShares’ high dividend and low volatility portfolio almost always uses its 3.1% output, but its focus on more traditional equities has led to a 43% huge negative performance of 3% over the past three years. There is also a cheaper 0.3% cost ratio, which is a true differentiated manufacturer, nearly 2 percentage points cheaper than 2.24% of HIE’s.

So the real lesson is to take it? CEFs can outperform ETFs – but you can not just pick names from hats.