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A flurry of strong U.S. economic indicators, especially the better-than-expected May job growth number which is one of the key gauges of the Fed policy determination, set the stage for a September timeline for the Fed rate hike. This, along with rising supplies of debt securities pushed the yield on the benchmark 10-year Treasury note to this year’s high of 2.42% on June 9. In such a backdrop, yield-loving investors might be looking for ways to beat the benchmark Treasury yield and yet enjoy decent capital gains. For them, we highlight some ETF choices that provide extra yield and might be in focus once the Fed puts an end to the rock-bottom interest rate environment. Senior Loan ETFs Senior loans are issued by companies with below investment grade credit ratings. In order to make up for this high risk, senior loans normally have higher yields. Since these securities are senior to other forms of debt or equity, senior loans give protection to investors in any event of liquidation. As a result, default risk is low in this type of bonds, even after belonging to the junk bond space. Moreover, senior loans are floating rate instruments and provide protection from rising interest rates. In a nutshell, relatively high-yield opportunity coupled with protection from the looming rise in interest rates post Fed tightening should help the fund to perform better in the second half of 2014. PowerShares Senior Loan ETF (NYSEARCA: BKLN ) The most popular and liquid fund in this space is BKLN with AUM of $5.7 billion. The fund tracks the S&P/LSTA U.S. Leveraged Loan 100 Index and holds 115 securities in its basket. It has weighted average maturity of 4.71 and average days to reset of just over 35. Though senior loans account for a hefty 83.7% of the assets, high yield securities also make up for 9% share in the basket. The product charges an expense ratio of 65 bps a year and pays out an attractive dividend yield of 3.95%. The ETF has added nearly 1% in the year-to-date timeframe (as of June 9, 2015). Preferred Stock ETFs Preferred stocks are hybrid securities having the characteristics of both debt and equity. The preferred stocks pay the holders a fixed dividend, like bonds. These types of shares normally get priority over equity shares both in case of dividend payments as well as at the time of liquidation if the company fails. Preferred stocks are thus relatively stable and usually exhibit a low correlation with other income generating assets. These products are interest rate sensitive – lesser than the bond space though – but a high yield opportunity might present them as potential bets once the Fed hikes rates. iShares S&P U.S. Preferred Stock ETF (NYSEARCA: PFF ) PFF is perhaps the biggest and the most popular name in the preferred stock ETF space. With total assets of $13.3 billion, it is one of the largest funds in this category. The ETF charges 47 basis points in fees. The fund has returned 1.83% so far this year (as of June 9, 2015) and pays out 6.09% per annum as dividends. The ETF holds 302 securities in all and eliminates concentration risk by allocating a mere 15% of its total assets in its top 10 holdings. Business Development ETFs Business Development Companies (BDCs) are firms that give loan to small and mid-sized companies at relatively higher rates and often grab debt or equity stakes in those companies. BDCs dole out high cash payments together with captivating the equity performance of the borrower. The U.S. law obliges BDCs to hand out more than 90% of their annual taxable income to shareholders. Market Vectors BDC Income ETF (NYSEARCA: BIZD ) The ETF looks to invest in a variety of BDCs which are traded in the American market by tracking the Market Vectors U.S. Business Development Companies Index. The ETF has $82.5 million in AUM. In total, BIZD invests in 29 firms with a relatively high level of concentration in the top names. Ares Capital and American Capital account for 14.6% and 9.9% of total assets, respectively. The fund yields 8.29% annually (as of June 9, 2015) and is up about 3% year to date. Originally posted on Zacks.com Scalper1 News
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