An Assault On Yield-Oriented ETFs

Includes: AMJ, BDCS, SPY
by: Gary Gordon

Are we tiring of the fiscal cliff story? Is it becoming cliche to state the obvious… that uncertainty over the resolution of expiring tax breaks and potential spending cuts is adversely affecting the stock market?

Perhaps. Yet one avenue that hasn’t received as much digital ink is the possibility that “yield” is turning into a dirty word. (It may have five letters, but yield-oriented assets have been performing like four-letter losers!)

Consider what we might typically expect when economic growth is weak; that is, sub-par expansion usually favors income producers. Dividend stocks, utility stocks, master limited partnerships, REITs — each tends to rely less on economic cycles and more on reliable income streams.

However, the current uncertainty surrounding future tax policy is wreaking havoc on income producers. Many have been hit every bit as hard as the broader S&P 500 SPDR Trust (NYSEARCA:SPY).

High-Yielding ETFs Since Post-Election Selling Spree (11/7-11/15)
Annual Yield % Drawdown %
iShares Mortgage REITs (NYSEARCA:REM) 12.6% -6.4%
KBW High Dividend Yield Financial (NASDAQ:KBWD) 10.6% -8.5%
CEF Income Composite Portfolio (NYSEARCA:PCEF) 8.1% -7.3%
E-TRACS Wells Fargo Business Dev Co (NYSEARCA:BDCS) 7.8% -6.4%
Global X Super Dividend ETF (NYSEARCA:SDIV) 7.2% -4.8%
iShares High Yield Corp Bond (NYSEARCA:HYG) 6.8% -1.9%
iShares S&P Preferred (NYSEARCA:PFF) 5.8% -2.1%
Guggenheim Multi-Asset Income (NYSEARCA:CVY) 5.4% -6.3%
JP Morgan Alerian MLP (NYSEARCA:AMJ) 5.2% -8.6%
S&P 500 SPDR Trust (SPY) 2.0% -5.0%

Theoretically, of course, the vast majority of assets in the table should have a built-in buffer against downside erosion. The distribution component on yield-oriented ETFs should offset excessive capital depreciation.

On the other hand, the market has presented a different theoretical construct. Specifically, if dividend tax hikes have the potential to be worse than capital gains hikes… can you still afford to hold onto the cash flow generators?

From my vantage point, no asset should be deemed “riskless.” One still needs to employ hedges or stop-limit loss orders to manage all of the ETF asset types, including yield-oriented ETFs.

By the same token, an investor should not wait for calm waters to participate. If you have cash that you’ve been waiting to put to work, and if you do not currently own assets like JP Morgan Alerian (AMJ) or E-Tracs Wells Fargo Business Development Company ETN (BDCS), now might be the perfect time to “get your yield on.” Just make certain that you have an exit plan.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.