A Close Look at the Claymore/Zacks Yield Hog ETF

CEF powerhouse Claymore Securities has launched a new ETF by the name of Claymore/Zacks Yield Hog (CVY). If they chose the quaint name to make income investors pay attention - and they did - I think they are pretty sure to succeed.

A look at the fund's Investor Guide tells us a few interesting things about it. First, it tells us that they measure themselves against the DJ Select Dividend index, which means that they aim to compete directly with iShares Dow Jones Select Dividend ETF (DVY) -- hence the ticker symbol. It's obvious that they want a piece of the $6 billion plus pie that the DVY has in assets. The question is: Should they get it?

The concept of the fund is to invest not just in American dividend yielding stocks (which nonetheless will constitute at least 50% of assets), but also in ADRs of foreign dividend stocks (up to 20%) Master Limited Partnerships (up to 25%), preferred stocks (up to 20%), REITs (up to 20%) and finally closed-end funds (up to 10%). Basically the yield hog will invest in almost every sort of income security. Of the major components in an income portfolio, only bonds are not directly represented (though they do make a small part of the CEF holdings).

One advantage of this approach will certainly be a higher yield than the 3.4% of the DVY. They haven't actually said what the yield will be. But based on the index's constituents list I was able to calculate a weighted-average yield of 5.82% (This figure excludes two convertible-preferred stock holdings, IPG-A and SCT-A, which I was unable to evaluate on the count of imminent conversion). Subtract the 0.6% fee, and you get a projected fund annual distribution rate of 5.22%.

While this figure certainly represents some extra juice, I suggest income investors take it with a grain of salt. Here's a list of flaws I found in the fund:

* It has a high management fee (0.6% capped), which is supplemented by the management fees of the other investment companies it owns.
* Some of its CEF holdings trade at par or even at a slight premium to NAV (like the ECV).
* Some of the equity holdings are quite risky (PFACP,NEW) and a lot of the dividend income is not as secure as the underlying income of the DVY or SDY.
* It smells of active management. The index is proprietary and the methodology is therefore unavailable. The prospectus leaves quite a bit of wiggle-room in terms of the weighting of the different sectors. One moment they may have 25% in MLPs. Another moment none at all.

To the fund's credit, it is certainly well-diversified (the BEP covered-call fund is the largest holding, at 1.15% of assets) and has quite a few interesting individual holdings, which indicates to me that they are doing something right.

The bottom line is this: If as an income investor you feel you must bundle all your exchange-traded income securities into one symbol, then by all means this is the one. But remember that you will be putting all your eggs in one proverbial basket, which is not such a good idea. It's also prudent to wait a few years and see the track record before making this a core holding. On the other hand, as a non-core holding, it is probably over-diversified and won't really add anything to a portfolio that already has a good balance of income securities.

I feel an income investor can do better by picking just a few ETFs and CEFs, one or two best-of-breed funds from each of the asset classes represented in the CVY. Companies like Claymore would serve us better by creating low-cost passive ETFs for the preferred and MLP arenas, than by bundling everything up into one big hog.

Disclosure: At the time of writing the author owned shares in the DVY, and had no other positions in the securities mentioned in the article.

Related: Seeking Alpha's coverage of new ETFs • Claymore's CVY ETF -- Moving ETFs From 'Sector' to 'Strategy' • Roger Nusbaum: Yield Hog: Claymore's Newest ETF

Comment on this article

Comments

[Paul Meisel]

It seems it will attract some favorable attention just because of the limited offerings in the "dividend" space, particularly due to the high yield which should put a floor under the downside. I would be more comfortable with a better description of their methodology, though. This seem less like an index fund than a formula-constructed portfolio -- possibly similar but not the same thing.

[Panskeptic]

I have no problem with the smell of <b>active management</b>. Considering these treacherous waters, I'm quite comfortable having someone steer. Passive indexing can be risky, too. But if that's your preference, I'm sure we'll get individual ETFs for preferreds and MLPs before too long.

[Internet2k4]

I haven't got the skinny on total holdings, but from the top 10 it looks like there might be a lot of Canadian income trusts, which have high yields (better in Canada with MLP-like tax treatment) but more importantly for US investors have the benefit of the significant C$ currency appreciation over the last few years. It's a reasonable guess that a 90 cent "Loony" is as high as it will get and the C$ will generally trend with oil and gold, contra the U$. So how much of CVY's back-testing reflects currency?