Most Innovative New Income ETFs

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It’s hard to imagine that in a universe of 1,546 U.S.-listed ETFs and ETNs, there’s still room for innovation. But innovate is exactly what a handful of ETF issuers did in the past year, bringing to market some problem-solving value propositions to income-oriented investors.

Among the 157 ETFs that were launched in 2013—and the nine new funds that have already come to market in the first month of 2014—there are a few income-focused strategies that provide investors more tools to generate income at a time when Fed monetary policies are making the hunt for yield more difficult.

Below is a list of four of these interesting strategies, not listed in any particular order.

4. Market Vectors Treasury-Hedged High Yield Bond ETF ( THHY | D )

THHY tracks a market-cap-weighted index comprising high-yield corporate bonds, while shorting five-year Treasury notes in a strategy that hedges interest-rate risk.

It’s a strategy that essentially offers access to junk-bond yields, while protecting investors from the detrimental impact higher interest rates would have on a bond portfolio. That’s because, by shorting Treasurys, the fund reduces its effective duration, lowering its yield to maturity. The net result is a portfolio that has a weighted average maturity of 1.9 years, but an effective duration of near zero, and a yield to maturity of 4.7 percent currently.

“It’s one of the first products to give investors a portfolio focused solely on credit risk, with an embedded mechanism designed to eliminate duration risk,” said IndexUniverse ETF analyst Paul Baiocchi.

THHY has an annual expense ratio of 0.80 percent, or $80 for each $10,000 invested. The fund has rallied 3 percent since it came to market on March 22, 2013.

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3. Cambria Shareholder Yield ETF ( SYLD | B-44 )

SYLD is an actively managed fund that invests in U.S.-listed equities that have strong cash flow as characterized by dividends, shares buybacks and net debt paydown.

The ETF was Cambria’s first solo effort after teaming up with AdvisorShares on another fund.

The fund added a new wrinkle to the dividend-yield trend, adding share buybacks and a net debt screen to the methodology.

“At a time when share buybacks are one of the most pervasive trends in the market, SYLD is right in the sweet spot of the market,” Baiocchi said.

In an interview at the time of the launch, Cambria’s founder and Chief Executive Officer Mebane Faber told IndexUniverse:“Dividends are great, and the evidence has been that dividend-paying stocks—and higher-dividend-yielding stocks—have outperformed the broad market both in the U.S. and around the world for as long as anyone has been calculating returns. But dividends are only one of five things a company can do with its cash when it’s making money.”

SYLD has an annual expense ratio of 0.59 percent, or $59 for each $10,000 invested. The fund has rallied 17 percent since it came to market on May 14, 2013.

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2. Credit Suisse Gold Shares Covered Call ETN ( GLDI | 45 )

GLDI tracks an index that uses a covered-call strategy to add income to gold, an asset that’s typically devoid of yield.

The ETN offers the returns of a covered-call strategy comprising shares of the SPDR Gold Trust (GLD | A-100), and one-month call options with a strike price of 103 percent of GLD, according to our ETF Analytics data. GLDI pays a monthly variable coupon based on the sale of covered-call options within the index.

In essence, what GLDI does is offer investors another alternative with which to express a view on gold. By design, if gold prices decline, and GLD share prices drop below the strike price of the calls, the call options never get exercised. The investors get the cost of that covered call back and added to their returns.

GLDI’s strategy helps offset some of the downside relative to GLD if gold prices tumble, mitigating the risk associated with gold. In fact, since inception, GLDI has slid some 23 percent—roughly 3 percentage points less than GLD in the same period, but still a sizable decline.

“GLDI takes one of the main critiques of gold—that it doesn’t have a yield—and adds yield by selling covered calls,” Baiocchi said. “In a gold market like we saw in 2013, this was of little consolation, but in a methodical uptrending market, it will rule the roost.”

As Credit Suisse, the issuer of the ETNs, puts it in its website, “In a consistently upward-trending market or in an extremely volatile market, a covered-call strategy can underperform a long-only investment in the underlying asset, because it will fail to capture all of the potential upside and can miss out on significant gains.”

“If the underlying asset price declines, a covered call strategy may result in a loss,” Credit Suisse said.

GLDI has an annual expense ratio of 0.65 percent, or $65 for each $10,000 invested. GLDI came to market on Jan. 29, 2013.

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1. WisdomTree Barclays U.S. Aggregate Bond Negative Duration Fund ( AGND )

AGND is the first negative-duration bond portfolio offered in a nonleveraged or inverse ETF wrapper.

The fund takes investor concerns about exposure to duration to a new level.

What’s interesting is that it serves up exposure to the broad Barclays Aggregate index—one of the most popular bond benchmarks in the market—while shorting a basket of Treasurys. That short position is enough to bring the effective duration of the portfolio to negative territory.

AGND’s current effective duration is roughly negative-five years.

Unlike other WisdomTree ETFs, this one does not track an in-house index; it tracks the performance of the Barclays Rate Hedged U.S. Aggregate Bond Index, Negative Five Duration. This allows myriad investors who are already allocated to the Barclays Aggregate to remain on familiar turf. The advantage is that with AGND, they now enjoy an added tool that allows them to manage duration.

If you were to simply invest in a fund like the iShares Core Total U.S. Bond Market (AGG | A-98)—an ETF that has more than $14 billion in assets—you’d own a portfolio currently showing a duration of 5.2 years. The farther in the curve, the more sensitive the portfolio is to interest-rate risk.

AGND has an annual expense ratio of 0.28 percent, or $28 for each $10,000 invested. The fund has been in the market less than a month.

( Editor’s note: There is not enough market performance history yet for a chart.)

Charts courtesy of StockCharts.com

 

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