YieldShares, a new ETF provider that has Christian Magoon at its helm, on Friday is rolling out its first ETF, an income-focused fund-of-funds strategy that’s similar to the PowerShares CEF Income Composite Portfolio (PCEF).
The YieldShares High Income ETF (YYY) will invest in about 30 closed-end funds (CEFs) with a heavy focus on equities CEFs. The fund will have an annual expense ratio of 1.65 percent, or $165 per $10,000 invested.
YYY is coming to market under Exchange Traded Concepts’ “ETF-In-A-Box” platform, and it amounts to the retrofitting of the Sustainable North American Oil Sands ETF (SNDS). SNDS, which costs 0.50 percent a year, will be discontinued as part of YYY’s launch, as the strategy failed to gather assets in the 10 months since its launch.
Going into YYY’s launch, SNDS has $1.2 million in assets, and investors holding those shares will get a one-for-one share swap Friday. The switch is designed to be a nontaxable event for investors who own SNDS, ETC’s Garrett Stevens told IndexUniverse.
It’s not unusual to have an ETF provider retrofit a strategy that’s no longer economically viable in this manner, because it’s often more economical to transition the fund into a brand-new strategy than liquidate a fund and start from scratch. And following SNDS with a yield-producing strategy seems sensible in a market starved for income opportunities.
Like PCEF, the new fund YYY will screen for CEFs that show high discounts to net asset value, high distribution rates and high liquidity. But YYY has a smaller portfolio—about a fifth the size of PCEF’s, which should provide for more focused access to high-income-generating names, Christian Magoon said in a recent interview.
“There’s an opportunity here being missed in the income ETF space,” Magoon said at the time, arguing that the market of income-producing ETFs is still underserved.
YYY’s higher focus on equities could land YYY among the top-yield-producing ETFs in the market as it captures more of the source of distributions, namely equities, according to Magoon. The fund will comprise about 60 percent equities CEFs and 30 percent bond CEFs—roughly the inverse of the split PCEF offers. PCEF is currently yielding about 7.6 percent.
YYY can invest in a variety of funds that own securities including equities, taxable investment-grade bonds, high-yield debt, municipal securities, preferred stock, convertible bonds, commodities and REITs, among others.
Eligible holdings, picked from the entire universe of U.S.-listed CEFs, must have at least $500 million in market capitalization and meet minimum trading volume requirements.
The funds are then ranked based on various factors such as fund yield; fund share price premium/discount to NAV on the index rebalancing date; and fund average daily value of shares traded over the six-month period prior to the index rebalancing date.
Once ranked, the top 30 underlying funds are included in the index, and are weighted based on what the company calls a “modified linear weighted methodology.”
That essentially means the weighting scheme begins by assigning the top-ranked security the greatest weighting in the portfolio that equates to the multiple of the smallest weighting—in a portfolio of 30 names, the top-weighted holding’s weight will be 30 times that of the smallest.
Still, weightings are “modified” in that each constituent weighting is capped at 4.25 percent of the overall mix regardless of this linear scheme, the filing said.
The index, created in partnership with YieldShares, calculated by Structured Solutions, and provided by the International Securities Exchange, is rebalanced annually.
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