The voracious investor appetite for yield has led UBS to launch new exchange traded notes focused on leveraged dividend plays. The bank has developed a method for the notes to employ a 2x leverage technique which rebalances on a monthly basis.
Patricia Oey of Morningstar reports that investors should weigh the intended larger yield with caution: She says they could end up "substantially" lower than the reported figures. The fees are layered and path-dependent, "so expenses will change based on the trailing performance of the index and can significantly drag on the performance (namely the yield) of this ETN versus its underlying index," she wrote.
The new ETNs are:
- ETRACS Monthly Pay 2xLeveraged S&P Dividend ETN (SDYL) SDYL aims to double the Standard & Poor's High Yield Dividend Aristocrats Index - that's the same benchmark for the $9 billion SPDR S&P Dividend ETF (SDY).
- ETRACS Monthly Pay 2xLeveraged Dow Jones Select Dividend Index ETN (DVYL) DVYL does the same thing for the Dow Jones U.S. Select Dividend Index, the same index that the $10 billion iShares Dow Jones Select Dividend Index Fund (DVY) tracks.
Each note is intended to double the price returns along with the dividends of the strategies. The distributions are made monthly as opposed to quarterly or annually, so this feature should appeal to investors wanting constant payouts, reports Brendon Conway for Barron's.
Investors should consider that when markets are moving in your favor in successive days a monthly leverage strategy can produce inferior returns to similar products that have a daily reset feature, reports Eric Dutram for Zack's.
These new leveraged ETNs should be monitored daily like all funds designed to magnify the market's performance.
Tisha Guerrero contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.