In this week’s Macro Theme, we review our “Slowing Dragon” theme. We began discuss...
Income Mix from Multi-Assets
10/01/2013 9:00 am EST
Just rolled out, this new UBS exchange traded note (ETN) is targeted at investors desiring significant monthly income from a diversified multi-asset mix, notes Ron Rowland in Invest with an Edge.
The ETRACS Diversified High Income ETN (US:DVHI) will track the new NYSE Diversified High Income Index minus the 0.84% annual tracking fee. The underlying index has a current yield of 7.7%, and the ETN will make monthly cash distributions.
The underlying index measures the performance of a diversified basket of 138 publicly-traded securities that historically pay significant dividends or distributions. Index features and construction aim to highlight income while seeking to reduce price volatility.
The methodology incorporates minimum free float market capitalization, dividend yield, and liquidity, while including asset class and sector weighting restrictions.
The index rebalances quarterly to maintain the target sector weightings. The index was created August 20, 2013 and therefore, has only one-month of performance history.
Target sector allocations encompass a wide range of asset classes. The stock/bond allocations are nominally at 70%/30%, and international exposure is estimated at 11% of the equity exposure and 33% of the bond holdings.
The underlying index has 138 constituents, with the largest allocations going to PowerShares Emerging Markets Sovereign Debt (PCY) 10.0%, iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 9.9%, iShares US Preferred Stock ETF (PFF) 7.0%, Market Vectors High Yield Municipal Index ETF (HYD) 4.9%, Ares Capital (ARCC) 4.2%, and Energy Transfer Partners LP (ETP) 4.0%.
UBS has come a long way since 2009, when I was highly critical of nearly every new ETRACS that came to market.
Today, I consider the UBS ETRACS lineup to be one of, if not the most innovative and complete ETN offerings. DVHI reinforces my improved perception of the ETRACS brand.
The DVHI fact sheet is the most informative, most complete, and best summary of a new ETP that I have seen this year. It succinctly describes the target asset class allocations, top holdings, indexing methodology, and key features.
It doesn't try to hide the risks and shortcomings. Instead, it includes the ETN disclosures on the front page instead of buried in the small print and even highlights the fact the index was created just a month ago.
The fact sheet also informs us that investors will not receive the full 7.7% yield because it will be reduced to cover investor fees and any withholding taxes. Therefore, I estimate the ETN's yield will be about 6.8%.
This is very attractive for the current environment, especially considering its 70%/30% stock/bond mix.
However, I expect DVHI to have significant volatility because of the asset classes included. Business Development Companies, mortgage REITs, and international equities are quite volatile, as are the emerging market and high yield bond allocations.
Bottom line: If you are looking for high current income versus income growth and can stomach the risk and volatility of the underlying asset classes, then DVHI should be on your list.
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