Chance Carson

Chance Carson
Contributor since: 2008
Cliff, Nice series. Thank you. might check your use of "principle", however. Correct spelling is "principal" for Money matters. I always differentiate the uses of "principle" and "principal" by recalling that money is my "PAL," as was my high school "princiPAL". LOL! Best wishes.
Chance Carson, Editor,
Great admonition to be wary of getting too overly concentrated in debt securities right now with interest rates being so low. I agree wholeheartedly. You may have missed, however, that seven of the fifteen asset classes we recommended for retirees are equity asset classes, NOT debt.
And as you know, investing in debt strategies needs to be done all along the interest rate curve, carefully laddering bond portfolios into short and intermediate maturities.
A fixed income investor needs to fully understand the four major risks in debt investing: credit (issuer) risk, tax risk, inflation (purchasing power) risk and and especially, as you correctly point out, interest rate risk.
Selecting the correct range of durations and maturities in a bond portfolio is critical indeed.
Thanks for your reminder ,
Chance Carson
Hi Emerald,
I'm not sure what point you're meaning to communicate.. We've mentioned 15 different asset classes which have fairly robust distribution rates (from a low of 5.1% for Munis and Emerging Market debt to a high of 13.3% for non-investment grade corporates).
The average distribution rate for all 15 asset classes is 8.25%. To us, this seems like an intriguing and well diversified place for retirees to find remarkable income in this scary market...
Did you mistake the current distribution rates we quoted to be our recommendation of what per cent of one's portfolio to allocate to each asset class? Or were you simply remarking about how remarkably high distribution rates have been driven.
On Feb 09 11:11 AM Emerald wrote:
> Your distribution list adds up to 123.8%. Ouch!
FLYLOW, Philman and CTA: Thanks for your comments.
Yeah, CTA, we also noticed the low correlation of CYT with the Yuan. Bummer!
By the way, Barclays just launched another bundled currency ETN-
(Barclays GEMS Asia 8 ETN. Symbol on NYSE Arca- AYT). This ETN bundles eight Asian currencies making it a bit too region specific for my tastes. I find JEM a much better world-wide diversified play with a significantly higher yield.

Murray Coleman of IndexUniverse wrote an excellent post about AYT last week which is an excellent overview worth reading if you are following or utilizing currency ETFs/ETNs: (
Ray: Excellent, helpful article. The arrows are a good clarification at a glance.. kinna a "Currency Trends for Dummies"..a great new book idea? lol!
Thanks again to d_teller: Very helpful clarification that UBTI may not exceed $1000/ year for EACH taxpayer ID, NOT per MLP.
All the more reason to stick with only securities wrapped inside C Corporations, a structure which issues a Form 1099, not a K-1.
Also a great heads-up about CanRoys (Canadian Royalty Trusts) which might convert to MLP status.

d_teller: Do you know of any service, newsletter, etc which might report on pending conversions to MLPs? Thank you again for your detailed discussion and clarification on these complex tax issues. Call me sometime..I'd like to pick your brain on a couple of other issues.
Thanks. (1-877-260-0800 toll-free). Chance Carson, Editor, (
Thanks again Ray...Great Primer on currency investing! Bobco23:
You might also consider BSR and GCE for diversifing your portfolio (see our article on JEM, BSR and GCE at Good luck!
David Lentz: Excellent question about the dividend safety of each of these 3 ETNs due to housing, banking or junk bond holdings.
So here's how they stack up: JEM- all Currency Yield plays with no direct exposure; BSR- all Energy Infrastructure Master Limited Partnerships with no direct exposure; GCE, on the other hand, DOES have moderate exposure. GCE holds 75 Closed End Funds, with each of individual CEFs having as little as zero exposure all the way up to as much as 100% exposure. Only two of its holdings have 100% exposure. The average exposure that GCE has to the troubled industries that you mentioned, David, (Financial, Housing, Banking and Junk Bonds) is currently 20.5%. We rate this risk as quite moderate considering the excellent diversification of this ETN, its current 7.5% Distribution Rate and its historically high 10%+ Discount to NAV (this large discount probably indicates that investor fears about the financials in the portfolio are already baked into the price).
We suspect that a basket of these three ETNs is not nearly as risky as you fear....time will tell.. Good luck and thanks again for your excellent question.
d_teller: Thanks for your thorough discussion about the tax risks and complications facing any tax-qualified account which seeks to hold securities issuing K-1s (such as Master Limited Partnerships -MLPs).
And as User 232593 aptly points out ( is in complete agreement) never, NEVER buy an individual MLP in your qualified retirement plan. While not a "prohibited transaction" per se, the risk of your custodian having to report "Unrelated Business Taxable Income" (UBTI) from certain MLPs just isn't worth it. Admittedly this risk is quite remote unless you hold particularly large blocks of individual MLPs which might generate more than $1000 per MLP annually. But we still advise you to just say NO!
Despite our negativism toward holding individual MLPs in your tax qualified plans, there ARE at least five securities which invest in Master Limited Partnerships which are perfectly fine to hold in your IRAs and other retirement accounts. These five holdings are structured as Type C Corporations and issue 1099s, not K-1s (even though each invests in MLPs.) By not issuing K-1s, these five different investments provide a secure way to enjoy the benefits which MLPs offer (mainly high distributions ranging from 6.1% to 8.4% per year) without the taxation confusion.
Four of these MLP asset plays are Closed End Funds and one is BSR, the Exchange Traded Note (ETN) which we featured in the above article. The four CEFs are FMO (Fiduciary/Claymore MLP Opportunity Fund-, SRV (Cushing MLP Total Return Fund-, KYN (Kayne Anderson MLP Investment Company- and MTP (MLP & Strategic Equity Fund-
Here are the current Distribution Rates and Premium or Discount for each CEF: FMO- 7.0% Dist, 7.75% Premium; SRV-7.5% Dist, 11.6% Premium; KYN- 7.3% Dist, 6.5% Premium; MTP- 8.46% Dist, 1.7% Discount. We would be sellers of FMO, SRV and KYN due to their Premiums to NAV. We would be buyers of BSR which generally trades at parity with its underlying Index and MTP for its slight Discount to NAV and its 8.4% Distribution Rate.
Thanks for your caution about the complex taxation issues facing individual investors utilizing currency ETNs. We fully agree at currency ETNs are best purchased by tax qualified accounts (or extraordinarily informed tax advisors!). The tax issues for individuals investing in GCE and BSR, on the other hand, seem straight forward.
Oops..I meant PGD not PDG..sorry!
Hi Ray..I'm writing an article on the several ETNs currently distributing dividends and was wondering if there are more than these four that I've found so far- GCE, JEM, PDG and BSR? Thanks for your help. We really appreciate your thorough articles on
We're also wondering if you might be willing to write a contributing editor article on currency ETN/ETF investing for our web-site If so, would you mind calling me to discuss what we're looking for in such an article? We believe an article by you would really be appreciated by our readers (we are a ETF/ETN resource portal for average individual investors seeking unbiased information about ETFs.) We personally have found your articles on currency investing to be pithy, extraordinarily informed pieces! We can even understand (usually) what you're talking about! LOL! Thanks again, Chance Carson, Editor, 719-268-0800.
Rick...Excellent article about ETNs!
Just to clarify, however, there actually ARE 4 ETN's which currently do(or are planning to) pay dividends. (You had mentioned that "ETNs don't pay dividends, interest or capital gains")
The four ETNs which pay dividends are GCE (Goldman Sacks-Claymore CEF Index Linked ETN), BSR (BearLinx Alerian MPL Select ETN) ,PGD (Barclays Asian and Gulf Currency Revaluation ETN) and JEM (Barclays GEMS Index ETN).
GCE invests in a basket of 75 discounted Closed-End Funds following a CEF Index selected by Claymore Securities ( GCE's distribution rate is variable with the past three quarterly dividends being $1.66, $0.28 and $0.64.
BSR is an energy infrastructure play which invests in fifty Master Limited Partnerships (MLPs) which track the "Alerian MPL Select Index" ( One unique feature of this ETN is its issuance of a 1099 at year end, rather than the K-1 Partnership tax reports normally associated with individual MLP holdings.
Both PGD and JEM are currencies bundles pegged, to some extent, to the US Dollar, and were just recently brought to market by Barclays on June 18, 2008. PGD includes currencies of the Saudi Arabian riyal, Hong Kong dollar, United Arab Emirates dirham, Singaporean dollar and the Chinese yuan. The GEM bundle will include currency holdings from 15 Global Emerging Markets (hence the symbol, GEM) in Eastern Europe, the Middle East, Africa, Latin America an Asia. Both PGD and GEM will distribute interest earned on the locally earned currency deposits on a quarterly basis. The rates are yet to be determined. (
Joetown has asked about the impact of Auction-Rate Preferred Securities (ARPS) in Closed-End Funds. Great question! Recent ARPS related settlements by UBS, Citicorp, Wachovia, Merrill Lynch and others certainly highlights the importance of Joetown's question. The ARPS market is far from dead, however.
Leverage in Closed-End Funds is commonplace. Leverage in the form of bank loans, debt issuances and the placement of ARPS, allows the fund managers to borrow at very low rates and invest the proceeds into much higher yielding investments. Capturing these yield spreads, less expenses, boosts CEF distributions substantially. Until recently, the low rates, liquidity and safety of ARPS, had been the CEF's leverage strategy of choice. Claymore, as is the case with many other CEF sponsors, actively rolls over its ARPS weekly at LIBOR plus 1.25%, a generally mandated rate in the event of auction failures.
Claymore's ability to issue AGC's (Advent/Claymore Global Convertible Securities & Income Fund) ARPS at 3.66% (as of August 8, 2008) and invest the proceeds at rates 3-4 times greater, is an excellent benefit to its Closed-End Fund common shareholders. The preferred shareholders aren't as lucky. In fact, at the moment, they are rendered essentially illiquid, receiving no more than the mandated rate. Since Claymore must represent the rights of both its common and preferred shareholders, they are actively seeking (as are all sponsors of Closed-End Funds) other suitable leverage strategies to replace their ARPS issuances. Much progress has been made to date. Claymore itself has already replaced $466 million, or 27% of its ARPS, since May, 2008. Nuveen and Eaton Vance have recently issued several innovative "Variable Rate Securities" as replacements for their ARPS. Industry experts believe these new securities may rapidly become a model for other issuers as well.
The important thing to remember is that Closed-End Funds will continue to leverage their holdings to improve their distribution rates to their shareholders, even after the ARPS crisis subsides. What types of leveraging strategies will emerge from the ashes of the ARPS debacle will be exciting to follow.
Joetown, regarding your concern about AGC's usage of ARPS, it presently holds only $170 million of these securities, representing 28.3% of its portfolio holdings. Furthermore, AGC's "1940 Act Asset Coverage Ratio" is 354%, well above the Act's minimum requirement of 200% coverage of senior securities, which are beneficial interests in any fund's portfolio. AGC's coverage is also well above the industry average of 300%.
You also mentioned AGC has had "negative earnings for the past two quarters." Indeed, AGC's share price has declined 20% this year through July 31, 2008. But, interestingly, its NAV has declined only 4.6%, which is quite remarkable given the S&P 500's 14% drop. Furthermore, AGC's distribution rate has remained a steady $0.1458 per share monthly since August 2007. This monthly rate does, however, include a 51% return of capital. We will be watching AGC's distribution policy carefully, as return of capital distributions can sometimes lead to potential distribution cuts.
Even when market prices are volatile and net asset values are declining, considerable benefit may often accrue to Closed-End Fund traders. One such trading strategy involves purchasing CEFs when their discounts spike significantly above their historical norms, and then selling them when their discounts contract back to "normal levels." A successful strategy for AGC, using this concept, is to purchase AGC whenever its variance exceeds the fund's normal discount by 20%. You would then sell the fund when its variance contracts back below 20%. This strategy would have generated eight roundtrip purchases and sales in the past 12 months netting a 39.3% gain, excluding commissions and taxes. All sales were short term. This strategy is extremely complex, volatile and risky, and should only be utilized by short term traders and speculators able to withstand potential losses in principal.
J'Adoube makes an excellent distinction regarding the use of words like "yields" and "distribution policies" by Exchange-Traded Funds and Closed-End Funds. Other financial journalists use "yield," "income," "dividend rate," "distributions" and "return" interchangeably. As J'Adoube correctly points out, there certainly are semantic differences. By not understanding these terms, an uninformed investor could easily land in hot water.
Both ETFs and Closed-End Funds constructed for income investors purchase debt and equity securities such as common and preferred stocks, Business Development Companies (BDC), Master Limited Partnerships (MLP), Royalty Trusts, Bonds, Convertibles, etc. These individual holdings pay periodic interest and dividends to the fund. The fund then declares its monthly or quarterly distribution rate based on the investment income it receives from the underlying securities. The Distribution Rate is not guaranteed, however, and the fund may increase, decrease or potentially eliminate its distributions at any time. The fund's Distribution Rate (sometimes referred to as its "Dividend Rate") is expressed as "x" cents per share for each period declared. The fund's "Current Yield" is calculated by dividing its annualized distribution rate by its current market rate.
The distinction that I believe J'Adoube would like clarified is that while a fund's "Distribution Rate" usually only includes its net investment income from portfolio investments, it may also include the fund's realized capital gains. More importantly, the fund may also distribute "Return of Capital." Making such distributions erodes the fund's "Net Asset Value" (NAV) performance over time. Moreover, including Return of Capital in its distributions gives the fund a false perception of being a higher performing investment than is actually merited.
When a fund's performance is declining (either it's market price or Net Asset Value), the fund's managers will sometimes resort to distributing return of capital to avoid reducing the fund's distribution rate. This perception of a "high dividend rate" may often catch uninformed investors off-guard as to what the actual fund is returning.
To learn whether your fund is returning capital in its distributions, I would recommend investors go online to the fund's "Section 19a-1 Letters" to be alerted to any distribution sources other than the actual net income. Caveat Emptor!
Dunn makes an excellent point. Investors who seek to entirely avoid principal risk should indeed never buy Closed-End Funds, ETFs or any other investment without a fixed maturity. A "laddered maturity" portfolio of US Government Treasury Bonds or Bank Certificates of Deposit would be much safer to one's principal. With today's miniscule yields on CD's and Treasuries, however, perhaps investors needing greater monthly income might still want to investigate alternatives, such as income-oriented ETFs and deeply-discounted Closed-End Funds.