Validea is an advisory service which assesses stocks based on the investing criteria of many of the ...
YieldShares: New ETF Eyes Income
10/03/2016 10:00 am EST
Amplify Exchange Traded Funds has just launched a new ETF designed to simplify the investment process for income investors; here, Christian Magoon discusses the new fund and its five "prime" components.
Steve Halpern: Our special guest today is Christian Magoon of Amplify Exchange Traded Funds. How are you doing today Christian?
Christian Magoon: I'm doing well, Steve. Thanks for having me on again. I appreciate it.
Steve Halpern: Now Amplify is known for building innovative ETFs that are targeted as unique market segments. Could you share a brief overview of the Amplify platform and how it develops these unique focused investment vehicles?
Christian Magoon: Yeah, thanks. We really believe ETFs help to amplify the investment experience for investors because we're really targeting the exchange traded fund wrapper and there's some characteristics of exchanged traded funds. They tend to be efficient, tax efficient, convenient, transparent, flexible and so what we do is really look for unique market segments or investments strategies that aren't yet available through an ETF and bring them to market and ultimately we think that amplifies really the opportunities and the potential for these investment strategies and ultimately, again, that flows through to investors.
We have several ETFs on our platform and one of which we just launched last week, which I think we are going to be talking about, PFV, which is the Prime Five Dividend ETF.
Steve Halpern: Now Amplify is also the sponsor of YieldShares, a brand of income oriented ETFs that you founded. Could you explain the relationship between Yield Shares and Amplify?
Christian Magoon: That's right, so Amplify owns YieldShares. YieldShares is really a brand of income ETFs. There really isn't an income focused ETF brand in the marketplace. There are plenty of income ETFs, but really hasn't been a sponsor that's tried to build out a suite of income products.
With YieldShares, our income brand, that's what we're trying to do, so we have a dividend income product right now and then a high current monthly income product, which is the YieldShares High Income ETF (YYY), which is the highest yielding diversified ETF in the United States based off ETF database rankings.
Steve Halpern: Now also you've just recently launched a new ETF called the Amplifiy YieldShares Prime Five Dividend ETF (PFV) and that's a portfolio of the five highest ranked US dividend ETFs. Could you walk us through the makeup of this and the selection criteria in choosing these funds?
Christian Magoon: Yeah, sure thing Steve. We really, in the market place as we've talked to investors and financial professionals, there really seems to be a little fatigue because of all the dividend ETFs that are out there.
You know, there's over 130 dividend ETFs you can choose from right now and the question we continue to hear was, what dividend ETF should I own? How do I have enough time to look at all 130 dividend ETFs to make the appropriate choice?
That's really the basis of why we decided to bring out the Amplify YieldShares Prime Five Dividend ETF, ticker PFV, so the ETF tracks an index that we believe looks at the three primary criteria when it comes to dividend ETF investing. These are criteria that we hear time and time again that investors look at when they try to decide, which dividend ETF should I own. And here they are:
- A low expense ratio. Expenses matter certainly when you have an income product.
- Share price volatility. Dividend investors really don't like to see a lot of share price volatility in their dividend ETFs.
- Level of income. When you are looking at a dividend ETF, you want to have a substantial amount of income. Most groups will favor a higher income product than a lower income product.
What this index does that the ETF tracks, is looks at those three categories -- low expenses, low share price volatility, high income -- and ranks all the dividend ETFs to see which five have the highest overall rank across those three categories.And then the index selects the five dividend ETFs that have the best combined score and owns that group and it reassesses the entire universe on a quarterly basis as well.
PFV really answers the question, which dividend ETF do I own? Well here's a way to actually automate that process and own the five highest ranked dividend ETFs across the combined scoring of low expense ratio, low share price volatility and high dividend income. So we think this is fairly innovative. It provides a solution for investors and it changes the portfolio quarterly, but does so in the tax efficient wrapper of an ETF, which we think provides some other advantages in terms of trading cost and potential tax efficiencies.
Steve Halpern: As you've mentioned the specific life stocks that makes up this ETF, are going to change based on your system on a quarterly basis. Could you touch on some of the funds that currently make it on the Prime Five list?
Christian Magoon: Yes, so let's talk about the Prime Five as it exists right now. The weighting of the five ETFs tends to be very close to be equal weighted, so the lowest ETF right now is a 19% weighting of the entire portfolio. The highest weighted ETF is 21%. Very flat in terms of this weighting structure and you'll recognize the name, Steve.
The Vanguard High Dividend Yield Index Fund (VYM) is 20% of the portfolio and then it's rounded out by another Schwab Large Cap Value ETF (SCHV) and the Wisdom Tree High Dividend Fund (DHS), which is the lowest weighted at 19%. This is fairly flat weighted, again, almost equal weighted portfolio of dividend ETFs from the names that most people think of when they think of Dividend ETFs, iShares, Schwab, Vanguard, WisdomTree.
But, again, it does it in an automated process in terms of its selection and then its quarterly rebalanced because some of these funds won't stand from quarter to quarter. The good news is that this is done again and the ETF, where there are some cost efficiencies and tax efficiencies as the portfolio changes.
Steve Halpern: Now, we've been faced with a low interest rate environment, which has made it particularly difficult for income investors. How does PFV help investors meet this challenge and what are you expecting personally, looking at interest rates over the coming year?
Christian Magoon: We really see the increase of interest in dividend stocks being driven by ultra-low interest rates and the lower distribution potential that the fixed income, even the CD market offers to investors.
With a dividend ETF yielding somewhere between 2.5% to 3%, it's fairly attractive versus some of the alternatives right now, whether it's in the treasury market or CDs or other types of income securities.
We see continued demand for this especially not only due to interest rates being low historically, but also due to changing demographics of the United States, where more and more investors are moving from accumulation of wealth to distributions on their wealth, really this whole phase of retirement and retirement income.
In terms of my view on interest rates, I think we are going to see a rise in interest rates. I think it's going to be very gradual. Current market sentiment is something I agree with that the Federal Reserve will seek to try to raise rates later in the year, probably December.
And that could obviously be postponed, which it has been many times, if we see some volatility crop up due to geopolitical events, maybe data in China; potential issues in Europe, could even have some derailment due to the presidential election outcome here in the United States.
While I think it's possible if we maintain current data and current trajectories that interest rates will rise, I think there's so many factors that could impact it where we stay the same, but ultimately I believe, no matter what we're talking about, the raise is going to be very immaterial to kind of the conditions that we've seen over the many years of quite a bit higher interest rates.
If we go up 25 basis points, I don't think that's going to have a very material impact on markets and my guess is, we may not see many increases going into 2017, given the current landscape.
I think investors who are searching for income, who can't really spend the time analyzing 130 or 140 dividend ETFs, should take a look at PFV and some of the selection criteria because I think they make common sense.
If anything, even if they're not interested in the ETF, they may actually find some interesting ideas of dividend ETFs that rank very high when it comes to the combined factors of expense ratio, share price volatility and income.
We hope that this provides a solution to those income investors in today's marketplace who are really squeezed to find a material amount of income to support maybe retirement or other current income needs.
Steve Halpern: Well, congratulations on the launch of the Amplify YieldShares Prime Five Dividend ETF. Again our guest is Christian Magoon. Thank you for your time today.
Christian Magoon: Thanks Steve.
Related Articles on STRATEGIES
The Roman philosopher Seneca wasn’t talking about the stock market when he wrote that “T...
The Dow Theory was originally referred to as “Dow’s Theory,” since it was based on...
When stocks are selling at valuation extremes and consumer optimism is at one of the highest levels ...