Tag Archives: income

CEFL Still Attractive With 21.9%Yield

My projection of a $0.2758 monthly dividend for CEFL would result in a 21.9% yield on an annualized compounded basis. The weighted average discount to book value for the closed-end funds that comprise CEFL is less than it has been recently, but it is still substantial. The action by UBS to not issue any new notes of its outstanding ETRACS ETNs, which included CEFL, does not impair the credit or liquidity of CEFL. The enormous discount to book value than many of the closed-end funds has lessened somewhat. Last month, all 30 of the index components of the UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ), and the YieldShares High Income ETF (NYSEARCA: YYY ), which is based on the same index and thus has the same components as CEFL, but without the 2X leverage, traded at discounts to book value. They are still trading at discounts to book value now. From the inception of CEFL until two months ago, there were always some component closed-end funds trading at premiums to book value. Two months ago, two of the components were trading at premiums to book value. The discount to book value is not as large as it was a month ago. On a weighted average basis, the closed-end funds that comprise CEFL are trading at a 11.77% discount to book value as of October 23, 2015 as compared to 13.8% a month ago. The median discount for the 30 closed-end funds is 12.41% as compared to 14.25% a month ago. Thus, the case for CEFL based on the large discount to book value still exists, but is less compelling than it was previously. There has been some confusion regarding the decision by UBS AG (NYSE: UBS ) that it does not intend to issue any new notes in 38 of its outstanding ETRACS ETNs. These include CEFL. UBS stated in an October 8, 2015 press release : “…This announcement does not affect the terms of the outstanding Series A ETRACS ETNs identified below, including the right of noteholders to require UBS AG to redeem their notes on the terms, and at the redemption price……. In connection with the previously announced transfer by UBS AG to UBS Switzerland AG of specified assets, UBS Switzerland AG became a co-obligor of all outstanding debt securities designated as Series A, including the Series A ETRACS ETNs, issued by UBS AG prior to the transfer date…” This in no way impairs the rights or liquidity of CEFL and there are now two stated co-obligors for the ETNs, which if anything improves their credit. However, Fidelity now does not allow its customers to buy the Series A ETRACS ETNs. This has caused some confusion and inconvenience for Fidelity customers and some frustration for Fidelity employees who realize this prohibition makes very little sense. However, as far as I know, no other brokerage firm has prohibited its customers from buying the UBS ETNs. Closed-end funds typically trade at either discounts or premiums to book value. On balance, there is a slight bias towards discounts. Because of significant changes in the composition of the index, comparisons of aggregate discounts to book value from previous years are not very meaningful. That said, the 13.8% discount last month was the largest since the inception of CEFL. Six months ago, CEFL had an 8.6% weighted discount to book value. Thus, in just five months, the discount had increased from 8.6% to 13.8%, but has since come down to 11.77% For many securities other than closed-end funds, such as common stocks, discounts or premiums to book values are logically based on the business prospects for companies. Thus, Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) trades at significant premium to book value, while Peabody Energy (NYSE: BTU ) trades at a significant discount to book value, reflecting differing market perceptions of the future prospects for those companies. Google trades at approximately 5X book value while BTU trades at about one-fifth of book value. In my article: mREITs Impacted By Enormous Price To Book Swing – MORL Yielding 27.6%, I discussed the large discounts to book value that mREITs such as American Capital Agency Corp. (NASDAQ: AGNC ) are trading at. The logic behind mREITs such as AGNC trading at significant discounts to book value is primarily based on the possible impacts of higher future interest rates. Whether one agrees or disagrees with the magnitudes of the discounts or premiums to book for securities such as Google, Peabody and AGNC there are facts and logic related to each company’s business prospects that could possibly explain or justify changes in the premiums or discounts that have occurred in those stocks. There are no such facts or changes in market forecasts of business prospects that can possibly explain or justify changes in the premiums or discounts that have occurred in the closed-end funds that comprise CEFL. For closed-end funds, changes in the premiums or discounts to book value should be solely based on the value that investors place on the relative advantages and disadvantages of the closed-end fund structure, rather than the differing market perceptions of the future prospects for the securities in the closed-end funds’ portfolios. Investors in closed-end funds could purchase the securities held by a closed-end fund themselves. In most cases, there are also open-end funds available to investors that have risk, return and expense characteristics similar to any given closed-end fund. Changes in market perceptions of the prospects of the securities that comprise the portfolios of closed-end funds cannot logically explain or justify any change in the magnitudes of the discounts or premiums to book for the closed-end funds. Any such changes in market perceptions of the prospects of the securities in the portfolio should be reflected in the prices of the portfolio securities themselves. Thus, the ratio of the price of the closed-end fund to its book value should not be related to the expectations of the prospects for the portfolio securities held by the closed-end fund. If investors value the advantages of diversification, management and possibly lower transaction costs associated with owning a closed-end fund rather than owning the individual securities that comprise the closed-end fund’s portfolio more than the fees and expenses, which are the primary negative aspect of closed-end funds, then the closed-end fund will trade at a premium to book value. Conversely, if investors feel that the fees and expenses of the closed-end fund outweigh the advantages of diversification, management and possibly lower transaction cost associated with owning a closed-end fund, it will trade at a discount to book value. The trade-offs between the advantages and disadvantages associated with closed-end funds relative to the securities that comprise the portfolios of the closed-end funds are rational reasons for the closed-end funds to trade at discounts or premiums to book value. However, it is not rational for the discount or premium to be influenced by expectations of future returns on the securities that comprise the portfolios of the closed-end funds. If the market thinks that the securities in a closed-end fund’s portfolio will decline, and thus the net asset or book value of the closed-end fund will decline, there is no reason why the premium or discount that the closed-end fund is trading at should change. Some closed-end funds employ limited amounts of leverage. As investment companies, closed-end funds cannot have more than 33% leverage and most employ less, if any. That a closed-end fund does or does not employ a relatively small amount of leverage should not impact the premium or discount that the closed-end fund is trading at. Leverage is the easiest characteristic of a security to offset. Thus, if an investor was interested in a security but did not like the fact that the security employed 20% leverage, the investor could offset that leverage by combing that security with a risk-free asset. For example, if you had $10,000 to invest and you liked a closed-end fund but were unhappy with the 20% leverage, investing $8,000 in the closed-end fund and $2,000 in a risk-free asset will result in the same risk/return profile as investing $10,000 in the same closed-end fund, if that fund did not employ any leverage. Likewise, if you liked a closed-end fund but would rather that fund employed more leverage, you can buy that fund on margin and get in the same risk/return profile as investing in the fund if it had more leverage. Thus, leverage or lack of leverage should not influence the premium or discount that the closed-end fund is trading at since any leverage in a closed-end fund can be offset by an investor. There should be some limits as to how far away from book value a closed-end fund should trade. If a closed-end fund is trading at a sufficiently high premium to book value, an arbitrage opportunity could exist. Buying the securities in the closed-end fund’s portfolio and simultaneously selling the closed-end fund should generate a profitable arbitrage. Likewise if a closed-end fund is trading at a large enough discount, buying the closed-end fund and selling the securities that comprise the portfolio, it could generate arbitrage profits. These types of arbitrage would be risk arbitrage as opposed to riskless arbitrage. In riskless arbitrage, one buys a security or commodity and simultaneously sells something that is the equivalent of what you sold. An example of riskless arbitrage would be after a merger had been approved in which the acquirer is issuing one share of its stock for two shares of the company being acquired, you simultaneously buy two shares of the company being acquired for a total cost less than a share of the acquirer. This would essentially lock in a profit that would be realized when the merger closed and the values converged. Attempting to take advantage of the discount to book value being irrationally wide for a closed-end fund would be an example of risk arbitrage since there is no terminal event that will make the value of what you buy converge with what you sell. It may be irrational for a closed-end fund to trade at a 10% discount to book value. However, there is always the possibility that it could go to a 15% discount. As Keynes famously said, “The market can stay irrational longer than you can stay solvent.” Closed-end funds do not usually provide convenient opportunities for explicit risk arbitrage transactions where one security is bought and the other security is shorted. Retail investors usually cannot use the proceeds from selling some securities short to buy other securities. Hedge funds and institutions that may be able to use the proceeds from selling some securities short to buy others might find closed-end funds, and especially some of the securities that comprise the portfolios of the closed-end funds, not liquid enough to trade in. Even market participants who are able to use the proceeds from selling some securities short to buy others might be dissuaded from buying closed-end funds and shorting the securities in the closed-end funds’ portfolio, because of the fees and expenses charged by the closed-end funds. However, if the discount to book value is large enough, the fees and expenses charged by the closed-end funds could be offset by the discount to book value and thus generate a positive carry for a long closed-end fund — short the fund’s portfolio position. This would be especially true for closed-end funds that specialize in securities that generate higher income, such as those in the index upon which CEFL and its unleveraged counterpart YYY are based. An example of the discount to book value more than offsetting the fees and expenses would be a hypothetical closed-end fund whose portfolio securities yielded 10% before expenses. Most income-oriented closed-end funds have expense ratios lower than 1%. Shorting $100 worth of the securities that comprise the fund would require payments of $10 representing 10% annually to those who the securities were borrowed from. The $100 proceeds from the short sale could be used to acquire $100 of the closed-end fund. If the closed-end fund was trading at a 14% discount, $100 of the fund would represent 100/.86 = $116.28 worth of the securities in the fund. These securities yield 10%, so the gross income from the fund position would be $11.63. The net income, assuming a 1% expense ratio, would be $10.63. Thus, even after expenses and fees, an account long the closed-end fund would generate higher income than the portfolio securities while it waited for the discount to narrow to realize the risk arbitrage profit. While explicit risk arbitrage where the portfolio securities are shorted and the proceeds are employed to buy the closed-end fund might not occur in significant quantities to narrow the discount to book value, implicit arbitrage should eventually have an impact. Implicit risk arbitrage would occur as investors holding or wanting to hold securities with similar risk/return characteristics as a closed-end fund or the portfolios held by the closed-end fund shift from other securities to the closed-end fund. Institutional investors who had portfolios that contained securities similar to or identical to those held in a close-end fund could improve their risk/return profile by shifting out of securities in the closed-end fund to the closed-end fund, if the discount to book value for the closed-end fund was large enough. Retail investors could switch from securities held in portfolios of close-end fund to the closed-end fund and improve their risk/return profile if the discount to book value for the closed-end fund was large enough. More important, investors could shift out open-end mutual funds into closed-end mutual funds with similar objectives and portfolios. Open-end mutual funds are sold and redeemed at net asset value. Thus, there is never any discount or premium to book value for an open-end mutual fund. Advantages for investors in no-load mutual funds are that there are no transactions costs and the funds can always be redeemed at net asset or book value. Closed-end funds usually require some brokerage commission to buy and sell them, and there is risk that the closed-end fund will fluctuate due to changes in the premium or discount to net asset value in addition to fluctuation in the portfolio securities. The advantages of no-load open-end mutual funds are somewhat offset by the lower fees and expenses that closed-end funds usually have. When closed-end funds are trading at large discounts to book value, investors can significantly increase their returns by switching from open-end funds to closed-end funds that have similar assets but are selling at discounts to net asset value and typically have lower fees and expenses. When an investor redeems an open-end fund at net asset value, the open-end fund sells portfolio securities to fund the redemption. That would tend to lower the market prices of those portfolio securities. If the investor uses the proceeds from the redemption of the open-end fund to buy shares in a closed-end fund that holds similar portfolio securities, the net effect would be to put downward pressure on the market prices of the portfolio securities and upward pressure of the market prices of the closed-end funds. Thus, the discount to book value for the closed-end funds will tend to decline. This large discount to net asset value alone is still a good reason to be constructive on CEFL. Although with the discount receding, the case is not as compelling as previously. It should be noted that saying CEFL components are now trading at a deeper discount to the net asset value of the closed-end funds that comprise the index does not mean that CEFL does not always trade at a level close to its own net asset value. Since CEFL is exchangeable at the holders’ option at indicative or net asset value, its market price will not deviate significantly from the net asset value. The net asset value or indicative value of CEFL is determined by the market prices of the closed-end funds that comprise the index upon which CEFL is based. My constructive view on CEFL stems not only from the wide discount to book value of the closed-end funds, but also from the very large dividends paid by CEFL. One troubling aspect of CEFL is the significant amount of the dividends paid by the closed-end funds that comprise CEFL that consists of return of capital. My calculation using available data indicates that 18.5% of the November CEFL dividend will consist of return of capital. Another caveat is that, as is shown in the table below, some of the closed-end funds have not officially declared their monthly dividends with ex-dates in October 2015. All of those have declared the same monthly dividend for at least the last five months. I have assumed they will declare the same dividend in October as they did in the last five months. Of the 30 index components of CEFL, and YYY, which is based on the same index and thus has the same components as CEFL, but without the 2X leverage, 29 now pay monthly. Only the Morgan Stanley Emerging Markets Domestic Debt Fund (NYSE: EDD ) now pays quarterly dividends in January, April, October, and July. Thus, EDD will not be included in the November 2015 CEFL monthly dividend calculation. My calculation projects an November 2015 dividend of $0.2758. This is an decrease of 6.1% from the September 2015 dividend of $0.2938, which also did not include any contribution from EDD. While the 2014 year-end rebalancing has reduced the monthly CEFL dividend, it is still very large. For the three months ending November 2015, the total projected dividends are $0.8733. The annualized dividends would be $3.4932. This is a 20.0% simple annualized yield with CEFL priced at $17.49. On a monthly compounded basis, the effective annualized yield is 21.9%. Aside from the fact that with a yield above 20%, even without reinvesting or compounding, you get back your initial investment in only five years and still have your original investment shares intact. If someone thought that over the next five years markets and interest rates would remain relatively stable, and thus CEFL would continue to yield 21.9% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $269,233 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $21,900 initial annual rate to $58,962 annually. CEFL component weights as of as of September 30, 2015, prices as of October 23, 2015 Name Ticker Weight Price NAV price/NAV ex-div dividend frequency contribution return of capital First Trust Intermediate Duration Prf.& Income Fd FPF 4.91 21.72 23.56 0.9219 10/01/2015 0.1625 q 0.0128 Eaton Vance Limited Duration Income Fund EVV 4.55 13.15 15.11 0.8703 10/8/2015 0.1017 m 0.0123 MFS Charter Income Trust MCR 4.49 8.2 9.36 0.8761 10/13/2015 0.06276 m 0.0120 0.0628 Doubleline Income Solutions DSL 4.45 17.9 20.04 0.8932 10/14/2015 0.15 m 0.0130 Blackrock Corporate High Yield Fund HYT 4.4 10.37 11.82 0.8773 10/13/2015 0.07 m 0.0104 0.0012 Clough Global Opportunities Fund GLO 4.38 11.31 13.02 0.8687 10/14/2015 0.1 m 0.0135 PIMCO Dynamic Credit Income Fund PCI 4.34 18.9 21.8 0.8670 10/7/2015 0.164063 m 0.0132 Prudential Global Short Duration High Yield Fundd GHY 4.33 14.53 16.59 0.8758 10/14/2015 0.11 m 0.0115 Alpine Total Dynamic Dividend AOD 4.27 8.04 9.47 0.8490 9/21/2015 0.0575 m 0.0107 Eaton Vance Tax-Managed Global Diversified Equity Income Fund EXG 4.23 9.15 9.97 0.9178 10/21/2015 0.0813 m 0.0131 0.0659 Alpine Global Premier Properties Fund AWP 4.18 6.22 7.32 0.8497 9/21/2015 0.05 m 0.0118 Western Asset Emerging Markets Debt Fund ESD 4.13 14.37 17.06 0.8423 10/21/2015 0.105 m 0.0106 0.0146 Eaton Vance Tax-Managed Diversified Equity Income Fund ETY 4.13 11.3 12.04 0.9385 10/21/2015 0.0843 m 0.0108 ING Global Equity Dividend & Premium Opportunity Fund IGD 4.04 7.69 8.6 0.8942 10/1/2015 0.076 m 0.0140 0.0266 BlackRock International Growth and Income Trust BGY 3.86 6.55 7.17 0.9135 10/13/2015 0.049 m 0.0101 0.0417 GAMCO Global Gold Natural Resources & Income Trust GGN 3.75 5.84 6.21 0.9404 10/14/2015 0.07 m 0.0157 Prudential Short Duration High Yield Fd ISD 3.5 14.87 17.01 0.8742 10/14/2015 0.11 m 0.0091 Aberdeen Aisa-Pacific Income Fund FAX 3.39 4.74 5.59 0.8479 10/19/2015 0.035 m 0.0088 0.0147 Morgan Stanley Emerging Markets Domestic Debt Fund EDD 3.37 7.57 9.04 0.8374 9/28/2015 0.22 q MFS Multimarket Income Trust MMT 3 5.88 6.75 0.8711 10/13/2015 0.04517 m 0.0081 0.0452 Calamos Global Dynamic Income Fund CHW 2.89 7.71 8.76 0.8801 10/7/2015 0.07 m 0.0092 Backstone /GSO Strategic Credit Fund BGB 2.78 14.38 16.76 0.8580 9/21/2015 0.105 m 0.0071 0.0012 Blackrock Multi-Sector Income BIT 2.15 16.34 18.95 0.8623 10/13/2015 0.1167 m 0.0054 Western Asset High Income Fund II HIX 2.09 6.86 7.59 0.9038 10/21/2015 0.069 m 0.0074 0.0006 Allianzgi Convertible & Income Fund NCV 1.86 6.38 6.96 0.9167 10/8/2015 0.065 m 0.0066 Wells Fargo Advantage Multi Sector Income Fund ERC 1.75 12.03 14.07 0.8550 9/11/2015 0.0967 m 0.0049 0.0283 Wells Fargo Advantage Income Opportunities Fund EAD 1.38 7.86 8.91 0.8822 9/11/2015 0.068 m 0.0042 Nuveen Preferred Income Opportunities Fund JPC 1.29 9.28 10.26 0.9045 10/13/2015 0.067 m 0.0033 Allianzgi Convertible & Income Fund II NCZ 1.15 5.69 6.2 0.9177 10/8/2015 0.0575 m 0.0041 Invesco Dynamic Credit Opportunities Fund VTA 0.98 10.87 12.55 0.8661 10/13/2015 0.075 m 0.0024

Major Changes In My Retirement Portfolio

Summary I continue to keep skin in the game with my ETF-based retirement portfolio. This year saw two ETFs get sold, a new ETF added, and a change in the portfolio’s weighting scheme. Steps were taken to enhance the portfolio’s dividend yield (with the expectation of a nearly 20% capital gain on one investment). In May 2014, I set up a retirement portfolio (with my real money invested) made up only of ETFs (” 5 ETFs For A Reliable Retirement Portfolio “), which was followed quickly by a modification (” Adjusting the ETF Retirement Portfolio “). The ultimate goal is to construct a portfolio that will: Provide better than 5% yield (annually); Provide a modest level of growth; Be as maintenance free as possible. The initial portfolio consisted of the following five ETFs: SPDR SSgA Income Allocation ETF (NYSEARCA: INKM ) iShares Morningstar Multi-Asset Income ETF (BATS: IYLD ) First Trust Multi-Asset Diversified Income Index Fund (NASDAQ: MDIV ) PowerShares CEF Income Composite Portfolio (NYSEARCA: PCEF ) PowerShares S&P 500 Low Volatility Portfolio (NYSEARCA: SPLV ) PCEF was added to the portfolio in May, to replace iShares Moderate Allocation ETF (NYSEARCA: AOM ), which I quickly got rid of. This is how the portfolio (would have) performed for 2014: 1 (click to enlarge) It was never my expectation that I would outperform the S&P 500 ; my assets were divided between large caps (through SPLV ), bonds ( INKM & IYLD ) and high-yield instruments ( PCEF & MDIV ). That the portfolio kept it fairly close, though, was gratifying. In December I made two changes to the portfolio 2 : I sold both MDIV and PCEF to enable me to add to the holdings of INKM , IYLD and SPLV ; and I added iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ). My reasoning was that neither MDIV nor PCEF were performing up to expectations; if the point of the two funds was to provide dividends, I could find a better yield by switching to REM . PCEF was clearly underperforming, and while MDIV seemed to hold its own, it consisted of holdings in six high-yield areas: REITs, BDCs, MLPs, high-yield bonds, preferred stock and high-dividend stock. A weight on energy stocks struck me as undesirable, given the oil market, so I thought dropping MDIV was for the best. 3 By increasing the holdings in the other three funds, I hoped I would realize an improvement in growth. Stagnation During Early 2015 Over the course of the next five months, the portfolio consisting of INKM, IYLD, REM and SPLV performed thusly: (click to enlarge) Again, I did not expect to keep even with the S&P, but the following graph illustrates the quandary in which I found myself: Somewhat paradoxically, what was holding the portfolio back was SPLV , which is a subset of the S&P 500, which was doing just fine. Perhaps this is somewhat to be expected from a set of companies chosen for their low volatility, but that should not have meant a period of fairly significant underperformance (let alone negative performance). In June 2015, I had the opportunity to examine a new ETF: iShares FactorSelect MSCI International ETF (NYSEARCA: INTF ). This fund seemed to address concerns I had about investing in global or international funds — it focused on roughly 200 companies located in fairly solid, developed nations; the companies were deemed to be good values , of high quality , and having positive momentum . The fund struck me as an excellent tool for investing in relatively safe foreign markets. So, in June, I sold off INKM and IYLD , and added INTF to the portfolio. My reasoning here was that IYLD looked better to be replaced with a larger position in REM (since REM was paying about double the dividend); INKM was where most of my foreign exposure was, but INTF looked to offer better growth opportunity with only slightly less dividend; the Greece situation seemed to be under control and Western European nations seemed to be recovering – and the largest part of INTF is invested in Western Europe. 4 I also considered revamping the weighting of the portfolio. Initially, the holdings were value-weighted, in that I had an equal number of shares of each ETF. This was disrupted somewhat when I dropped PCEF for REM ; REM is far less expensive than most ETFs (currently just over $10.00/share), and I would be able to take better advantage of its ~ 12% (at the time) yield if I doubled the number of shares compared to the other funds. When I reached the decision to sell INKM and IYLD , I decided to switch to an equal-weighted scheme, dividing the portfolio equally between REM , INTF and SPLV . 5 I hoped that these changes would result in a significant improvement in portfolio yield, along with an expected improvement in value growth. The market, however, had other plans. The Summer “Correction” The summer of 2015 was fairly brutal for stocks, which got dragged down by several factors: the Chinese economy looked to be faltering seriously; European nations had their social resources taxed by a dramatic influx of immigrants fleeing civil unrest in Syria and elsewhere in the Middle East; oil continued to be problematic; U.S. political issues continued to threaten increasing the debt ceiling, the Asian trade pact and the Export -Import Bank; the Fed seemed trapped by its earlier assertions that a rate increase would be imposed late this year. And to top it all off, ETFs were soundly trounced over the week of August 17-25. Exactly why the ETF market “misbehaved” may not be completely certain, but despite safety features in place to halt trading at points where the market is distressed, ETF prices seemed to march to the beat of a completely different drummer than their NAVs. The following chart tells the story: (click to enlarge) Between August 17 and August 25, the S&P dropped to $1867.61 from $2102.44 (-11.17%), and the ETF/R portfolio dropped to $10,182.82 from $11,104.26 (-8.30%). Overall, ETF/R dropped 3.74% since June 1, compared to a drop of 4.16% for the S&P. The following chart reflects the performance of the individual ETFs in the portfolio (INKM and IYLD are included for sake of comparison): Everything has been running negative since June, but SPLV only barely so. The drop in value suffered by REM is offset by its > 13% yield. Since Inception, Then… Here is the portfolio’s total return, up to 15 October 2015: (click to enlarge) Not bad, all things (especially August) considered. The current yield for the three funds taken together is 5.97%. Supplementing the yield is interest from a baby bond issued by Phoenix Companies, Inc. (NYSE: PNX ) – Phoenix Cos. Inc. 7.45% QUIBS (PFX). I purchased shares at a discount ($20.91), raising the yield to 8.90%. This raises my portfolio’s overall yield to 6.42%. Long term, redemption of the bond will result in a gain of 19.5% over purchase price (on top of the interest received). 6 What if… ? It may not always be a good idea to compare what one has now to what one might have had, had one not made certain changes; but in the spirit of “due diligence” I did look at what might have happened had I not swapped INKM and IYLD for INTF and larger holdings of REM and SPLV . 7 The following chart compares ETF/R (currently consisting of INTF , REM and SPLV ) to ” ETF/OP ” – ETF/”Original Portfolio” — consisting of INKM , IYLD , REM (with fewer shares) and SPLV : (click to enlarge) The divergence between the portfolios begins after 1 June, when the original portfolio was reconstituted; the difference between the two portfolios is a small — but still noticeable — 73bps . It occurred to me that there was one factor in the reconstitution of the portfolio that I had not yet taken into account: when I switched to INTF and an equal-weight system, I added ETF/R’s earnings from dividends to the proceeds from the sale of INKM and IYLD . The injection of capital into the equation may have tilted the comparison, so I added a third portfolio to the test: ETF/R-A — the portfolio as it would have been had I not infused the additional money (but still equal weighted). The following chart (covering only the period since 1 June) is interesting: (click to enlarge) (Note that the figures in the diagram cover only 1 June-15 October.) The only difference between ETF/OP and ETF/R-A is a hardly negligible 7bps . ETF/R suffered a larger loss, dropping an additional 58bps . From the above, it is possible to infer that the primary cause for the difference in performance between ETF/R and ETF/OP is the additional capital added to ETF/R. Injecting those funds changed them from a static datum added to portfolio performance, into a part of the data subject to the vacillations of the market value of the funds. Just as the extra capital resulted in larger losses during the market drop, however, that capital should yield improved performance as the market increases. 8 Observations It’s not really possible to determine if the switch from INKM and IYLD to INTF and increased holdings in SPLV and REM was a good move or not, in light of the bad summer. The following graph gives a snapshot of the performance of each of the ETFs that have occupied the portfolio: REM is not really to be expected to give much of a performance in terms of value — its function is to provide dividend income, and it does that well. INTF had the misfortune of being added to the portfolio just before the market took a dive, so any judgment of it will have to wait until more evidence is collected. It is paying dividends, however. SPLV was supposed to be the anchor of the portfolio, and it has served this purpose well. In the period from 1 January 2014 through 15 October 2015, the fund is up by 14.08%. By way of comparison, State Street’s SPDR S&P 500 ETF ( SPY ), which closely tracks the S&P 500, is up only 10.59% over the same period. It is possible that I reconsider INKM at some point. Likewise, IYLD . I think the portfolio will end up stronger, however, for the holdings in INTF . It will take a while to see if the shift to an equal-weighted portfolio will have significant benefit, but it does appear to have improved my yield: the greater the number of shares of REM in the portfolio, the more dividends I realize. That’s a good thing. Disclaimers This article is for informational use only. It is not intended as a recommendation or inducement to purchase or sell any financial instrument issued by or pertaining to any company or fund mentioned or described herein. All data contained herein is accurate to the best of my ability to ascertain, and is drawn from the performance information regarding the ETFs mentioned. All tables, charts and graphs are produced by me using data acquired from pertinent documents; historical price data from Yahoo! Finance . Data from any other sources (if used) is cited as such. All opinions contained herein are mine unless otherwise indicated. The opinions of others that may be included are identified as such and do not necessarily reflect my own views. Before investing, readers are reminded that they are responsible for performing their own due diligence; they are also reminded that it is possible to lose part or all of their invested money. Please invest carefully. 1 I say “would have” for two reasons: the chart begins on 1/1/2014, rather than when I actually started the portfolio, since I built the portfolio over the course of 3 months, from late February into May; also, I made changes to the portfolio in June and December. I discuss these changes in the course of this article. 2 ” The ETF Retirement Portfolio Revisited .” 3 The holdings in REITs and BDCs – both of which are notorious underperformers – didn’t help MDIV’s case. 4 It also has Asian holdings, notably Japan and Australia; in any event, all of its holdings are in developed nations. 5 If you’ve been following me for a while, you might remember that I have been favoring equal-weighted portfolios ever since I examined Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ) here . Of course, you might ask why I stay with SPLV if I favor equal-weighted portfolios (like RSP’s). Fair enough; I also have a thing about all-inclusive portfolios. I like a fund that uses some finesse to narrow the field somewhat. I shall have to look at this approach in the future. 6 PNX was something of a risk, as the company has been having its problems. However, it was announced on 30 September that PNX had reached an acquisition agreement with Nassau Reinsurance Group Holdings L.P. (according to Zacks Equity Research , here ); this should provide substantial financial security to PNX. Upon redemption, I would see a 19.5% gain on share value, based on the issue price of $25.00. 7 I believe that considering a “what if” scenario concerning PCEF to be unproductive; subsequent yield would have been lower, added shares of SPLV would not have been purchased, and – ultimately – PCEF would have ended up being sold in June, after having lost additional share value. 8 As should be expected; this is, after all, the point of DRIP arrangements: taking dividend earnings and using them to buy additional shares of a holding is intended to augment the growth potential of a stock.

A High-Yield Option For Income Investors

Investing in financial markets has become considerably more difficult since the summer. High yielding assets, as well as stocks have taken a beating. Market Vectors High-Yield Muni ETF, however, has seen a steady increase in principal, while providing an attractive dividend yield. As the Treasury yield curve has contracted, alongside falling equity markets, investors have been left with few avenues to invest. Higher yielding dividend stocks, generally yielding below 3%, have seen declines in principle due to the most recent equity market rout. Additionally, junk bonds have seen broad selling pressure as investors shunned riskier assets for fear of slowing economic activity. A lone star, however, has emerged in the form of the Market Vec tors High-Yield Municipal Index ETF (NYSEARCA: HYD ) . This asset has risen close to 4% since early July, while yielding a dividend of 4.81%. This combination of appreciation of principle, as well as stable dividend yield, could be a smart play for investors seeking income in coming months. With the Federal Reserve stuck to its zero-bound lending rate, income investors have had trouble finding sustainable income sources. The global economy continues to weaken, alongside the persistence of foreign central banks loosening monetary policy, causing the Fed to potentially have trouble hiking rates in the near future. The chart below is of the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) over the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) . This indicator represents the Treasury yield curve. When the indicator declines, it signals a contraction of the yield curve, and thus lowered expectations of a rate hike for monetary policy. Since peaking in the summer of 2015, slowing economic growth, and global financial market volatility has spooked Fed members, forcing them to push out their projected time frame for hiking rates. Furthermore, with investors continuing to buy bonds, yields have fallen to levels providing very little income for investors. (click to enlarge) Moreover, financial market volatility has pushed both junk bonds, and broader equity markets lower. Investors feel that equity markets have topped globally, and the combination of falling currencies, and commodities signal that global growth concerns are finally resulting in increased caution. While dividend stocks may be outperforming the market on a relative basis, these companies are still losing value in 2015. As U.S. earnings season disappoints, investors are pushing all sectors lower. Additionally, weak equity market performance is weighing on junk bonds as risk sentiment diminishes. After my degradation of basically every asset class, there seems to be one lone performer that has provided true safe-haven status. High yielding municipal bonds have outperformed as investors favor the comfort of government backed securities, alongside an attractive yield. As municipalities have lowered their leverage in recent years, their perceived stability has risen. This index also does a nice job of spreading risk, allowing investors to get exposure to a basket of riskier municipal bonds, with lower overall default risk. The Market Vectors High-Yield Muni ETF has proven a strong investment amid the recent volatility in bonds, equities, and currencies. As long as the Fed prolongs raising rates, and financial markets remain volatile, this high yielding municipal ETF should provide steady gains. (click to enlarge)