The search for yield has income investors casting a broad net that includes asset classes such as junk bonds, preferred stocks, REITs and MLPs.
Traditionally, these investments have provided excellent income streams and even periods of equity-like returns.
However, many of these dividend generating sectors have reached the point where their annual yields are no longer attractive due to the capital appreciation of the underlying securities. This in turn makes it difficult for new money to effectively take advantage of both income and growth potential moving forward.
Prudent income seekers may be looking for other opportunities to enhance the yield on their portfolio, in which case they should closely examine the YieldShares High Income ETF (NYSE: YYY) and PowerShares CEF Income Composite Portfolio (NYSE:PCEF). Both of these ETFs are constructed using an underlying basket of closed-end funds to generate an extraordinary 30-day SEC yield of 8.57 percent and 7.49 percent, respectively.
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YYY uses a concentrated portfolio of 30 holdings that include both equity and fixed-income related closed-end funds. Right now, this ETF has 58 percent of the portfolio dedicated to stocks and 38 percent in bonds. The funds are selected according to three criteria that include: fund yield, discount to net asset value, and fund liquidity. This leaves you with a unique multi-asset strategy that provides an attractive monthly income stream to investors.
By contrast, PCEF has 149 underlying holdings that are overweight on the fixed-income side of the ledger. This fund currently has 67 percent of its portfolio dedicated to bonds and 33 percent in equity or options strategies. PCEF also pays a monthly yield and was the first ETF established in this category.
Closed-end funds offer a number of advantages to investors that include the ability to enhance income by using leverage. In addition, because the number of shares is fixed, they do not have to sell distressed holdings at inopportune times to satisfy redemption's. The fund manager is able to actively select and hold investments according to their research and analysis expertise.
It should be noted that both YYY and PCEF have expense ratios that are higher than the average ETF. With the inclusion of both management fees and acquired portfolio fees, the total expense ratio is listed at 1.65 percent and 1.73 percent, respectively. However, investors that are drawn to these ETFs are likely going to focus on the net monthly income and portfolio structure as their primary investment thesis.
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