Can You Beat These High Dividend ETFs?

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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