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A Better Yield ETF? UBS Launches High Income ETN

Eric Dutram

While there have been a few rough weeks for the ETF industry lately, many issuers are still putting out new products. And despite the broad trends in the market, income and emerging market products are leading the way in terms of sheer numbers, with a host of issuers putting out new instruments in this space recently.

The latest such product comes to us in the income space from UBS and their ETRACS brand name, the ETRACS Diversified High Income ETN (DVHI). This brand new exchange-traded note looks to offer up a new way to target high yield securities from around the globe in a variety of segments, potentially offering up a fresh perspective on income (see What Does Your Income ETF Focus On?).

Below, we have highlighted some of the key details for this innovative ETN for those out there who are looking for an income play that goes off the beaten path, and provides exposure to a number of different—and often overlooked-- market segments:

DVHI in Focus

DVHI looks to follow the NYSE Diversified High Income Index, changing investors an annual tracking rate of 84 basis points a year for this exposure. This benchmark follows the performance of a diversified basket of 138 publicly-traded securities that historically pay significant dividends or distributions.

With this focus, the index looks to highlight income, while also making sure that volatility isn’t too great thanks to the sector and security diversification. The index yield does come in at an impressive 7.7%, so clearly it looks to highlight income in a big way.

DVHI Holdings

In terms of the product holdings, the note is well spread out across a number of segments. Fixed income/preferred stock accounts for 40% of the portfolio, while equities make up the rest of the index (see 4 Excellent Dividend ETFs for Income and Stability).

The biggest individual sectors include BDCs and MLPs (15% each), while all of the fixed income and related segment gets 10% each, putting double digits in the following categories; muni bonds, high yield bonds, emerging market bonds, and preferred stock.

"Investors seeking high yields typically turn to investments in narrowly-focused asset classes or sectors," said Paul Somma, Senior ETRACS Structurer in a press release. "DVHI's exposure to a multi-asset index provides investors with access to a diversified portfolio of income-producing assets in a single, transparent, exchange-traded security."

It appears as though the ETN will use a variety of exchange-traded products for its index constituents, though some individual securities will also be included as well. Some of the top holdings at time of writing include the PowerShares Emerging Markets Sovereign Debt ETF (PCY), the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), and the iShares US Preferred Stock ETF (PFF).

How does it fit in a portfolio?

This note could be an interesting choice for those seeking a broad income play that goes across borders and asset classes. It also could be a good pick for investors who want some exposure to securities like MLPs, BDCs, and the like, but want it in a diversified way that doesn’t dominate a particular security’s return (see 3 Excellent ETFs for Growing Dividends).

This ETN may not be appropriate for cost conscious investors though, as its fee is a bit steep compared to other income plays out there. Plus, many ETNs have had some difficulty in accumulating assets, so volume and bid ask spreads could be somewhat of an issue.

ETF Competition

The high yield space is rife with competition as a number of issuers have jumped into this space lately. Some of the most likely competitors will probably be the iShares Morningstar Multi-Asset Income Index Fund (IYLD), the SPDR SSgA Income Allocation ETF (INKM), and the Guggenheim Multi-Asset Income ETF (CVY).

However, it is worth noting that there are a number of other choices out there too, so it isn’t like investors will be starved for picks in the high income space. DVHI does have a pretty robust yield that will be tough for many to beat though, so look for this one to put up a solid fight, assuming that investors can look past the ETN structure 'issues’ and its relatively high expense ratio.

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