ETRACS, the ETF issuing arm of Swiss banking giant UBS, has unveiled an exchange-traded note that seeks to provide high income through a diversified basket of equities and fixed income. Since the Federal Reserve has decided to continue the current pace of assets purchases, yields are likely to remain weak till the labor market improves and inflation remains benign.
If you are seeking higher yield, you may consider the latest UBS product since it offers a new way to target high-yield securities from across the globe, potentially providing a new perspective on income-focused products.
Multi-asset income funds have gained wide acceptance in the past year-and-a-half with the Guggenheim Multi-Asset Income ETF (CVY) leading the pack with assets of about $750 million under management. Nevertheless, UBS is the first sponsor to unveil a product in an ETN package and may appeal to investors who wish to avoid capital losses with the slow normalization of interest rates in the US.
The ETRACS Diversified High Income ETN (DVHI) is linked to the performance of the NYSE Diversified High Income Index, a multi-asset benchmark that follows the performance of a well spread-out basket of 138 securities that have historically paid high dividends. The index is split roughly 60:40 between stocks and bonds, while a number of constituents are actually ETFs. According to the company’s filings, the index – created on August 20 this year, has a current-yield of about 7.71 percent.
The equities portion of the underlying index, which makes up 60 percent of the portfolio, includes stocks of both US-listed and international companies (7.5 percent each), REITS (20 securities making up 7.5 percent), Mortgage REITS (15 securities contributing 7.5 percent), Energy MLPs (25 securities contributing 15 percent) and Business Development Companies (15 companies constituting the remaining 15 percent).
Fixed income/preferred stock accounts, which contribute 40 percent to the underlying index, consist of preferred stocks, high yield bonds, municipal bonds and emerging market bonds, with each category contributing an equal 10 percent to the portfolio.
Some of the top exchange-traded products in the index include the iShares US Preferred Stock ETF (PFF), iShares iBoxx US dollar High Yield Corporate Bond ETF (HYG) and the PowerShares Emerging Markets Sovereign Debt ETF (PCY).
DVHI is relatively expensive with an annual expense ratio of 84 basis points. If costs concern you, please also note ETNs are likely to face difficulty in accumulating assets initially, which may result in higher bid-ask spreads due to low trading volumes.
Disclosure: No holdings