With today’s low interest rate environment, current income has been
hard to come by. Yields on the benchmark 10 year Treasury bond are
currently around an ultra low level of just 1.5%, less than the
rate of inflation here in the United States.
As a result of this, many investors have been
forced to look beyond Treasury bonds for their income needs,
pushing investors into junk bonds, international debt, and a
variety of dividend stocks as well. While any number of individual
names could be good choices, a broad sector approach could be
appropriate for some investors who want to spread risks around a
group of companies (read 11 Great Dividend ETFs).
For these investors, a look at some of the ETFs
that offer up outsized payouts could be warranted, especially the
products that have truly remarkable dividend rates. In fact, a few
of the top yielders in the Exchange-Traded world actually have
yields that are approaching the double digit level, thoroughly
crushing not only the T-Bill yield, but the payout on the S&P
500 as well.
In particular, two products, which are structured
as leveraged Exchange-Traded Notes, could make for interesting
picks at this time. That is because both of these notes offer up a
potent combination of 2x leverage and high yield segments,
producing dividend Exchange-Traded Products that are tough to beat
solely from a payout perspective (see Three Excellent Dividend ETFs
for Safety and Income).
However, investors should note that the space is
not without risk by any means. The leverage structure suggests that
volatility will be relatively high, although the monthly
rebalancing feature inherent in these notes implies that they will
more closely track their indexes over extended time periods.
Additionally, since both are ETNs, they do have some credit risk of
the underlying institution, although there is no tracking error in
either of the products (also see ETFs vs. ETNs: What's The
Difference?).
Despite these risks, the yields on these two ETNs
are hard to pass up, especially considering the lack of high
yielding options out in the market place right now. So, if you are
willing to take on a little risk and volatility for an outsized
dividend yield, a closer look at either of the two ETNs highlighted
below could be a great idea:
ETRACS Monthly Pay 2xLeveraged Long Alerian MLP
Infrastructure Index ETN (MLPL)
MLP investing has become extremely popular as of
late due to the sector’s high yields and relative stability when
compared to the other corners of the energy world. Not only that
but most of the sector has to pay out the vast majority of its
income to unit-holders, making them favorites among a number of
dividend-focused investors.
In order to play this with an ETN, investors can
look to MLPL, which tracks the Alerian MLP Infrastructure Index
with 2x monthly leverage. This benchmark consists of 25
infrastructure MLPs, focusing in on firms that obtain the majority
of their income from the transportation and storage of energy
commodities (read Oil Bull Market is no Place for MLP ETF
Investors).
Top constituents in the underlying index include
Kinder Morgan Energy Partners (KMP), Enterprise Products Partners
(EPD), and ONEOK Partners (OKS). Mid cap stocks make up about half
of the product, while large caps account for another 38%,
suggesting a tilt towards the bigger side of the mid cap space.
Where the product really shines, however, is in the
yield column. Thanks to the leverage and the high payouts inherent
in the industry, the product pays out an impressive 10.7% in
current annual leveraged yield terms. However, the total return so
far in 2012 has been disappointing as it has lost about 2.9% from a
year-to-date look, although it is up 16% in the past 52 week
period.
Still, despite this truly fantastic performance,
the product has relatively light volume of about 44,000 shares a
day, suggesting modest bid ask spreads. Also, MLPL is somewhat
expensive, charging investors 85 basis points a year in fees as an
annual tracking fee.
ETRACS 2xLeveraged Long Wells Fargo Business
Development Company Index ETN (BDCL)
Another traditionally high-yielding space can be
found in what is known as the ‘Business Development Company’
market. Firms in this corner of the market invest in small
businesses that are in the initial stages of growth, generally
taking equity or debt stakes in these firms.
Much like their MLP counterparts, these firms
generally have to pay out a high percentage of their income to
investors on a regular basis in order to enjoy certain tax
privileges. Due to this, they are often high yielders as well,
making them an increasingly popular, but still overlooked,
destination for current income.
In order to access this space in basket form, a
look to BDCL could be a great idea. The note tracks the Wells Fargo
Business Development Company index with 2x monthly resetting
leverage, giving investors exposure to a cap-weighted benchmark
that measures the performance of BDCs listed on U.S. exchanges that
qualify as BDCs under the Investment Company Act of 1940.
In total, the underlying index offers up exposure
to roughly 26 companies, with close to one-third of the total going
to the top three companies; American Capital (ACAS), Apollo
Investment (AINV), and Ares Capital (ARCC). Additionally, investors
should note that almost two-thirds of the product is in micro caps,
while mid and small caps round out the rest, suggesting volatility
could be very high in the BDCL, especially in times of broad
turmoil.
Still despite this risk of volatility and leverage,
BDCL has been an outstanding performer. The product has added more
than 24% so far in 2012, although it is flat over the 52 week look.
However, the yield is truly impressive in this note as it comes in
at an unheard of 18.7% per year (see BDCL: Yield King of Leveraged
ETFs).
Unfortunately, this outstanding yield hasn’t really
translated into a big following as the product sees volume of about
35,000 shares in a normal day, suggesting relatively wide bid ask
spreads. Additionally, the UBS note charges 85 basis points a year
in fees, much like its MLP cousin.
This low volume, relatively high fees, and periods
of high volatility have undoubtedly kept some investors out of
BDCL. However, for those looking for a real dividend king in
today’s low interest rate world, this ETN is hard, if not
impossible, to beat.
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AMER CAP LTD (ACAS): Free Stock Analysis Report
E-TRC WF BDCI (BDCL): ETF Research Reports
ENTERPRISE PROD (EPD): Free Stock Analysis Report
KINDER MORG ENG (KMP): Free Stock Analysis Report
E-TRC UBS 2XLLA (MLPL): ETF Research Reports
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