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Two-X Funds: ETFs with High Yield and High Risk
04/11/2019 5:00 am EST
Responding to requests from our subscribers, we’re adding a new “ETF Leveraged Funds” portfolio to our list of Industry & Specialty portfolios, explains income expert Harry Domash, editor of Dividend Detective.
In finance, “leverage” implies using borrowed funds to enhance returns. For instance, why not pay 3% to borrow money if you can invest those funds in something paying 5%?
The leveraged funds in our new portfolio, termed 2X funds, use borrowed cash to produce twice the returns that they would if they weren’t leveraged. That is, in an up market, they go up twice as far as un-leveraged funds, and drop twice as much in a down market.
The way the math works, long-term results don’t exactly match the theory, but they come reasonably close. For instance, the two funds we just added to our portfolio averaged a 36% total return (dividends + share price appreciation) over the three-year period ending 3/28/19 vs. 20% for the S&P 500.
Leveraged funds are risky plays. Only use them in generally uptrending markets. Unfortunately, predicting what happens next is harder than it looks.
The funds in this portfolio are Exchange Traded Notes (ETNs), which, like ETFs, track the performance of a specified index, but unlike ETFs, ETNs don’t actually own the underlying assets.
We’re starting this portfolio with two ETNs. Credit Suisse X LINKS 2X Mortgage REITs (REML) tracks an index of U.S. Mortgage REITs, CS Mortgage is currently paying a 21.1% dividend yield and has returned 20% over 12-months. It started in trading in July 2016, so three-year returns are not yet available.
ETRACS Monthly 2X S&P Dividend (SDYL) tracks the S&P High Yield Dividend Aristocrats. It is paying a 5.3% dividend yield and has averaged 22% annual returns over three years. Obviously, investing in leveraged funds is only profitable if your fund’s market sector goes up more than it goes down while you’re holding it.
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