CVY Looks to Double the Yield of Other Dividend-Paying ETFs

Investment firm Claymore Securities launched the new exchange-traded fund [ETF] CVY last month, a portfolio which tracks securities in the humorously named Zacks Yield Hog Index. Although the fund has yet to declare a dividend, its stated goal is to carry double the yield of other dividend-paying ETFs. Since most other dividend-yielding ETFs currently carry around a 3% yield, this new Yield Hog ETF is expected to yield about 6%.

In fact, the fund currently has a portfolio of some 147 holdings with an average yield of about 5.8%. A somewhat modest management fee of 0.6% takes a bite out of that yield.

Unlike other dividend ETF indices, the Zacks Yield Hog Index is not limited to U.S. common stocks. Instead, CVY is the first ETF to invest in an index that also tracks such high-yield securities as preferred shares, master limited partnerships [MLPs], closed-end funds, foreign American Depository Receipts [ADRs], and real estate investment trusts [REITs].

In addition to providing a solid yield, the fund is primed to deliver superior total returns. In fact, one of the goals of the new Zacks Yield Hog Index, which the fund tracks, is to outperform the Dow Jones U.S. Select Dividend Index, which is linked to the popular iShares DJ Select Dividend Fund (NYSE: DVY). The Yield Hog's "CVY" ticker symbol is, of course, a humorous echo of rival "DVY."

Claymore back-tested the two indices, and the Yield Hog Index outperformed the Dow Jones U.S. Select Dividend Index over five years (16.4% vs. 11.0%), three years (19.3% vs. 15.4%), and one year (10.3% vs. 8.8%). Of course, past performance is no guarantee of future returns, but the test does augur well for the new fund.

To extract that extra yield, the fund counts among its top holdings two covered-call closed-end funds -- the S&P 500 Covered Call Fund (NYSE: BEP) and the Small-Cap Premium & Dividend Income Fund (NYSE: RCC). Both of these funds seek to generate additional income by writing call options on stocks in their portfolio -- a potentially lucrative strategy.

Action to Take: This fund offers the income investor a quick and easy way to diversify their portfolio with high-yield securities from key sectors within the income universe. Unlike mutual funds, which allow you only trade at the end of the day, ETFs like this one let you buy and sell anytime during the day. Plus, ETFs have lower expense ratios, averaging about 0.95% versus 1.4% for the average mutual fund.

CVY is certainly not without risk. For starters, the fund's performance is as of yet untested. And then there's the fact that not all holdings are rock-solid blue-chips with a long history of regular, stable dividends.

Still, no single security accounts for more than about 1% of its portfolio value, making CVY a relatively safe way to invest in a basket of high-yield securities.

With a net asset value of $25.68 per share, the fund is trading very close to the value of its underlying portfolio holdings. As such, it represents a good value. I like this fund for medium-risk investors, and would not be surprised to see it steadily rise as more investors become aware of it.

Disclosure: The author has no position in this fund.

Related:

A Close Look at the Claymore/Zacks Yield Hog ETF

Yield Hog: Claymore's Newest ETF

Claymore's CVY ETF -- Moving ETFs From 'Sector' to 'Strategy'

Comments

[JonD:]

the earlier, related articles on CVY present a much more in depth analysis of this security. this article sounds like an advertisement.

2006 Oct 25 09:57 AM

[Geoff Consi...:]

Oh my...covered call writing funds as a source of yield are a bid dodgy IMHO. The article above says that this is a 'potentially high yielding strategy.' Yeah--and also potentially a low yielding one. I do not work for the SEC, etc., but treating income from selling covered calls as dividends has always seemed dodgy to me. The premium that you receive is not the same as earnings from a company distributed as dividends. The covered call writer has sold a contingent claim that can potentially be 'called' in the future. Dividends, assuming unleveraged, are from past *actual* earnings against which there is no future claim.

See my previous articles on these funds at:

etf.seekingalpha.com/a...
etf.seekingalpha.com/a...

Peter Lynch said 'buy what you know.' An obvious extension to this is 'don't buy what you don't understand.' Many investors and advisors that I have encountered really do not grasp the difference between selling covered calls and true dividend income. There is a big difference.

2006 Oct 30 03:21 PM

[UserThunder...:]

CYY is a fund with intriguing holdings.

Mar 12 05:40 PM