More Diversifiers For A 15%+ Interest Rate Sensitive Current Yield Portfolio

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Includes: AMZA, BDCL, CEFL, EDF, LMLP, MORL, MRRL, OXLC, REML, SMHB, SMHD
by: Lance Brofman
Summary

Very high current yields can be obtained from a portfolio consisting mainly of 2X-Leveraged ETNs.

The highest yielding 2X-Leveraged ETNs have substantial interest rate risk.

Some diversification can be obtained in a high current yield portfolio by adding securities with relatively more credit risk.

The default risks associated with very high yielding fixed income securities seem to have increased for various reasons.

Securities that have current dividend yields above 15%, that could be use to diversify a portfolio are discussed.

Diversifying a Portfolio with Significant Interest Rate Risk

Many investors hold balanced portfolios consisting of both bonds and stocks. The logic behind this type of diversification is that there are some economic scenarios where stocks do better than bonds and other scenarios where bonds outperform stocks. A useful generalization is that stronger economic activity benefits the stock market relative to the bond markets. Likewise, weaker economic activity benefits the bond market relative to the stock markets. There are some exceptions to these generalizations. Economic weakness can exacerbate credit risks in the high-yield (Junk) bond market.

I have a portfolio where the most important constraint is to only include securities with current yields above 15%. Other constraints are the typical retail IRA account restrictions which preclude the use of short-selling, margin borrowing, and futures contracts. Some brokerage firms also impose additional constraints on IRA accounts. I suspect that there are many individuals, particularly those either partially or totally retired, who either have somewhat similar constraints or could possibly benefit from adopting them.

Given those constraints, the universe of possible investments is very limited. Other than junk bonds and other securities issued by individual distressed entities, in order to meet the 15%+ constraint, my primary investment focus in the quest for 15%+ current yield has been and is on 2x Leveraged High-Yield ETNs. As described in my 2013 Seeking Alpha article, "A Depression With Benefits: The Macro Case For mREITs," my macroeconomic rationale for investing in UBS ETRACS Monthly Pay 2X Leveraged Mortgage REIT ETN (MORL) - the only 2x leveraged mREIT ETN in existence at that time - was based on the premise that government policies shifting the tax burden from the rich and onto the middle class results in much more funds being available for investment relative to productive uses for those investable funds. That was one reason I concluded that interest rates would be relatively lower for longer than most market participants were predicting.

Another reason for my view that interest rates would not increase as much as the consensus was based on the premise that the Federal Reserve was not artificially reducing interest rates, as most believed, but rather keeping rates higher than a free market in risk-free securities would otherwise result in. This was put forth in another 2013 Seeking Alpha article - article Federal Reserve Actually Propping Up Interest Rates: What This Means For mREITS.

MORL and, later, UBS ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN Series B (MRRL) and the Credit Suisse X-Links Monthly Pay 2x Leveraged Mortgage REIT ETN (REML) have been the core instruments in my 15%+ current yield constrained portfolio. These are 2x-leveraged mREITs High-Yield ETNs. Leveraged ETNs have interest-rate risk since they implicitly borrow at short-term interest rates to finance their leverage. A significant part of their high dividends results from the carry that is generated when the dividends paid by the securities in the indices upon which the ETNs are based exceed the implicit borrowing rate. While typically called dividends, the payments from ETNs are technically distributions of interest payments on the ETN note based on the dividends paid by the underlying securities that comprise the index, pursuant to the terms of the indenture.

Additionally, 2x-leveraged High-Yield mREIT ETNs have extra interest rate exposure due to the fact that many of the component securities in the index, utilize leverage as well. Higher interest rates lower the value of the mortgage-backed securities held by the mREITs that comprise the indices upon which 2X-leveraged mREIT-based ETNs are based. The mREITs themselves borrow money to finance their holdings of mortgage-backed securities. Higher interest rates reduce the ability of the mREITs to pay dividends since higher rates increase their interest expense. Furthermore, 2X-leveraged mREIT-based ETNs implicitly borrow at some LIBOR-based rate which provides the 2X leverage, and thus higher interest rates reduce the dividends that 2X-leveraged mREIT-based ETNs pay.

My view has been that interest rates would stay lower for longer. However, that is something that no one could have been sure if. Thus, to hedge against the possibility that stronger economic growth and/or more aggressively hawkish Federal Reserve policies, I included securities in the 15%+ current yield constrained portfolio, that had relatively more credit risk and less interest rate risk than 2X-leveraged mREIT-based ETNs.

I have utilized UBS ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (CEFL) and UBS ETRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (BDCL) as diversifiers and for hedging possible macroeconomic outcomes. As I discussed in New Risks Appear For 2X-Leveraged mREITs, in November 2019, I added ETRACS Monthly Pay 2x Leveraged U.S. Small Cap High Dividend ETN (NYSEARCA:SMHD) The yield on SMHD usually exceeded both CEFL and BDCL and was only slightly less than MORL.

Using CEFL to diversify a portfolio based on 2X-leveraged mREIT-based ETNs such as MORL, MRRL, and REML has been fairly expensive, in terms of forgone return from an only mREIT-based ETNs portfolio. From inception on January 7, 2014, through to April 29, 2019, CEFL has had a total return of 35.77% based on closing prices and assuming reinvestment of dividends. That is an average annual of 5.93% over that 5.31-year period. Over the same January 7, 2014, through to April 29, 2019, period, MORL has had a total return of 137.74%. That is an average annual of 17.44% over that 5.31-year period. MRRL and REML have not been in existence as long as MORL or CEFL. As discussed in Considering 20+% Yielding REML As A Substitute For MORL, I pointed out that the returns on MORL have exceeded those of REML and MRRL, solely because UBS AG (UBS) has stopped selling new shares of MORL, which has caused MORL to now trade above its net indicative (asset) value. Other than that, the returns on MORL, MRRL, and REML have been very close.

BDCL, the oldest of the 2x-leveraged High-Yield ETNs that I follow, has generally been an expensive diversifier as well. From the October 17, 2012, inception of MORL through to April 29, 2019, BDCL has had a total return of 60.30% based on closing prices and assuming reinvestment of dividends. That is an average annual of 7.49% over that 6.53-year period. Over the same October 17, 2012, through to April 29, 2019, period, MORL has had a total return of 127.46%. That is an average annual of 13.4% over that 6.53-year period.

The Need For New Diversifiers

Junk bonds appear to be less efficacious as diversifiers in the 15%+ current yield constrained portfolio. Recent experience is that any bond or other fixed-income security that has a current yield above 15% also has a very high risk of bankruptcy. As I said in: mREIT-Based ETNs Now Have A Larger Role In The 15%+ Current Yield Constrained Portfolio

....There has always been bankruptcy risk associated with very high yield bonds. Of course, in many cases bankruptcy is unavoidable. However, in some cases corporate management seeks bankruptcy because that is what is best for them personally. In some industries managements have been more inclined to seek bankruptcy than others. Some managements of airlines and steel companies treat chapter 11 as a “spa” where they can rid themselves of pesky union contracts, common shareholders, creditors and leases while senior management basks in retention bonuses while plotting to maximize their take in new stock when the company emerges from chapter 11 or their personal rewards when the bankrupt company sells assets to vulture investors at unfair prices. (See Polaroid and Bethlehem Steel for egregious examples.) In some companies in some industries, bankruptcy could be considered as part of their business plan.

I am not trying to pile-on Donald Trump. However, he can be partially blamed the recent spate of bad faith corporate bankruptcies, and it has nothing to do with any of his economic policies. Not only did everyone who ever bought any stock in any public Trump entity end up with nothing. But most unusually, all of the public buyers of mortgage bonds on any of the Trump casinos also eventually ended up with zero recovery. That is almost unheard-of. In almost all other casino bankruptcies, publicly held mortgage bondholders had significant recoveries. The general public did not pay much attention when then candidate Trump bragged about how much he personally made from the casino bankruptcies (well after the statute of limitations for bankruptcy fraud had expired). However, you can be sure that managements of every distressed public company paid rapt attention. A flood of bad faith bankruptcy filings has ensued.

From some management’s perspective, a bad-faith bankruptcy that wipes out the common shareholders and leaves management with a bigger percentage stake than they held before the filing, in an entity with much less debt, is the preferred solution. That is unfortunately, sometimes the case, even if there are many ways to avoid bankruptcy in that distressed corporation's situation. After Trump’s bragging about how much he took out of his bankruptcies, bankruptcy appears to be now more of the first resort than the last resort for some distressed companies..."

In 30% Yielding MORL, MORT And The mREITS: A Real World Application And Test Of Modern Portfolio Theory, the degree of risk reduction provided by diversification was discussed. Even when a portfolio consists of many securities that have somewhat similar characteristics and have significant amounts of correlation, diversification can be beneficial. I am constantly seeking securities that have current yields above 15% and that are not likely to default in the near future. Increasing, most of the only securities that meet the criteria are based on employing diversification to mitigate the credit risk associated with individual securities that comprise a basket of risky assets, or employ some fairly weird strategies typically involving derivatives. Many of the best new candidates for inclusion in the 15%+ current yield constrained portfolio have come from comments to my Seeking Alpha articles.

Possible Diversifiers for a 15%+ Current Yield Portfolio

I believe in what George Goodman, who wrote and appeared on television under the name "Adam Smith" said: if you want to really learn about something, take a financial stake in it. As an example, he said, buy one corn future on the Chicago Board of Trade and you will find yourself up at 4:00 AM in the morning looking at weather patterns in Iowa. Unfortunately, for me, Mr. Goodman said that prior to the internet and the tremendous amount of interesting information and opportunities to do fascinating research it provides. Also, as many people who are retired or semi-retired people find out, there is not nearly enough available time for those books and other projects you thought could be easily finished after you stop working full-time.

That said, I bought a small amount of various securities for the express purpose of learning a lot more about them so that I could research and evaluate their use as possible diversifiers in the 15%+ current yield constrained portfolio and also write about them. However, so far, I have not had time to do so. These small positions include: InfraCap MLP ETF (AMZA), UBS ETRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN (LMLP), Oxford Lane Capital Corporation (OXLC), Stone Harbor Emerging Markets Income Fund (EDF) and Credit Suisse X-Links Crude Oil Shares Covered Call ETNs (USOI).

USOI is the most promising candidate so far. It is an ETN based on the Credit Suisse Nasdaq WTI Crude Oil FLOWSTM 106 Index. The "106" refers to the fact that the Index strategy consists of a hypothetical notional portfolio that takes a "long" position in Reference Oil Shares and sells a succession of notional, approximately one-month, call options on the Reference Oil Shares with a strike price of approximately 106% of the price of the Reference Oil Shares exercisable on the option expiration date. The biggest risk would seem to be a collapse in oil prices. That does not seem very likely in the near term.

One concern with USOI is that its option based-strategy is convoluted and takes a while for someone to understand. That was the case for me and I have a PhD in economics and finance and my doctoral dissertation was IMPLICATIONS AND APPLICATIONS OF ORGANIZED OPTION MARKETS FOR FINANCIAL THEORY. The "short" version of the USOI strategy from the Prospectus is:

...The return on the ETNs is based on the performance of the price return version of the Credit Suisse Nasdaq WTI Crude Oil FLOWSTM 106 Index (the “Index”) during the term of the ETNs. The Index is reported on Bloomberg under ticker symbol “QUSOI ”. The Index measures the return of a “covered call” strategy on the shares of the United States Oil Fund® (the “Oil Fund”, and such shares the “Reference Oil Shares”) (Bloomberg ticker symbol “USO UP “) by reflecting changes in the price of the Reference Oil Shares and the notional option premiums received from the notional sale of monthly call options on the Reference Oil Shares less notional costs incurred in connection with the implementation of the covered call strategy (the “Notional Transaction Costs”). The Notional Transaction Costs reflect the monthly transaction costs of hypothetically buying and selling the call options and selling the Reference Oil Shares and equal 0.03%, 0.03% and 0.01%, respectively, times the closing price of the Reference Oil Shares on the date of such notional transactions and, which, on an annual basis, are expected to be approximately 0.84%. The actual cost will vary depending on the value of the Reference Oil Shares on the date of such transactions. The Index strategy consists of a hypothetical notional portfolio that takes a “long” position in Reference Oil Shares and sells a succession of notional, approximately one-month, call options on the Reference Oil Shares with a strike price of approximately 106% of the price of the Reference Oil Shares exercisable on the option expiration date (the “Options” and together with the long position in Reference Oil Shares, the “Index Components”). The notional sale of the Options is “covered” by the notional long position in the Reference Oil Shares. The long position in the Reference Oil Shares and the “short” call options are held in equal notional amounts (i.e., the short position in each Option is “covered” by the long position in the Reference Oil Shares). This strategy is intended to provide exposure to West Texas Intermediate light sweet crude oil (“WTI crude oil”) futures contract prices through the notional positions in the Reference Oil Shares and the Options that together seek to (i) generate periodic cash flows that a direct long-only ownership position in the Reference Oil Shares would not, (ii) provide a limited offset to losses from downside market performance in the Reference Oil Shares via the cash flows from option premiums and (iii) provide limited potential upside participation in the performance of the Reference Oil Shares. The level of the Index on any day reflects the value of (i) the notional long position in the Reference Oil Shares; (ii) the notional Option premium; and (iii) the notional short position in the Options then outstanding; net of the Notional Transaction Costs. The ETNs will not participate in the potential upside of the Reference Oil Shares beyond the applicable strike price of the Options and the level of the Index will be reduced by the Notional Transaction Costs...

USOI has only traded since June 6, 2017. It has done better than MORL since then. From the initial closing price on June 6, 2017, of $21.63 through to April 29, 2019, price when the closing price was $24.19, USOI has had a total return of 39.22% based on closing prices and assuming reinvestment of dividends. That is an average annual of 19.69% over that 1.76-year period. USOI has a current yield of 19.54% As an ETN it trades very close to net asset value. I have added to my position in USOI.

OXLC looks somewhat promising and I have bought a small amount. It invests primarily in senior, secured loans made to companies whose debt is unrated or rated below investment grade (Senior Loans), with an emphasis on current income. These loans typically have adjustable interest rates. This means that most of the risk is credit risk. One concern is that it trades significantly above net asset value. The April 29, 2019, price was $10.72 and the most recent reported net asset value is $7.56 as of December 31, 2018, on that day it closed at $9.70. The net asset value is only reported quarterly. OXLC is older than MORL. From the October 17, 2012, inception of MORL through to April 29, 2019, OXLC has had a total return of 108.89% based on closing prices and assuming reinvestment of dividends. That is an average annual of 11.93% over that 6.53-year period.

EDF is another recent small purchase. It provides some diversification from the American economy and interest rates. Its distribution rate for the last year is 17.88% based on the most recent price of $13.33. One concern is the steep premium over its recent $10.22 net asset value. I intend to do more research on EDF before taking further action.

AMZA was a small purchase made in July 2017, it has a portfolio of 32 equity securities of publicly-traded master limited partnerships and limited liability companies taxed as partnerships in the energy infrastructure sector. It employs some leverage and writes options to enhance yield. From inception on October 2, 2014, through to April 29, 2019, AMZA has had a total return of -47.86% based on closing prices and assuming reinvestment of dividends. That is an average annual return of -13.27% over that 4.58-year period. Over the same October 2, 2014, through to April 29, 2019, period, MORL has had a total return of 99.55%. That is an average annual of 16.3% over that 4.58-year period.

LMLP is a 2x-leveraged High-Yield ETN based on the Wells Fargo Master Limited Partnership Ex-Energy Index. There are currently 14 constituents in the index. In contrast to AMZA, LMLP excludes energy infrastructure MLPs. From July 10, 2014, through to April 29, 2019, LMLP has had a total return of 21.94% based on closing prices and assuming reinvestment of dividends. That is an average annual of only 4.21% over that 4.81-year period. Over the same July 10, 2014, through to April 29, 2019, period, MORL has had a total return of 92.87%. That is an average annual of 14.65% over that 4.81-year period.

There are some other candidates that I am starting to look at.

Analysis of the May 2019 CEFL Dividend Projection

After the annual rebalancing, all but three of the CEFL components pay monthly dividends. Tortoise MLP Fund (NTG), Tortoise Energy Infrastructure (TYG), and Liberty All Star Equity Fund (USA) pay quarterly. Only USA had an ex-dividend date in April 2019. Thus, only USA contribute to the MAY 2019 CEFL dividend.

Wells Fargo Advantage Income Opportunities Fund (EAD) reduced its monthly dividend to $0.059 from $0.0594. USA reduced its quarterly dividend to $0.15 from $0.17. Templeton Emerging Markets Income Fund (TEI) reduced its monthly dividend to $0.07 from $0.0703. From the data in the table below, I calculated a projection for the May 2019 monthly CEFL dividend of $0.2118. The table shows the ticker, name, weight, dividend, ex-date, price NAV, and contribution to the dividend for the CEFL components that will contribute to the May 2019 March dividend.

Conclusions And Recommendations

I am always looking for ways to diversify my portfolio within the 15%+ yield constraint. USOI , OXLC and EDF were brought to my attention by comments in my articles. Comments regarding any high yielding securities are always appreciated.

Stocks and fixed-income securities, in a sense, compete for shares of investors' portfolios. A decline in the equity market can cause some investors to rebalance their portfolios to shift out of fixed-income securities into stocks. Likewise, a decline in the fixed-income market can cause some investors to rebalance their portfolio and shift out of stocks into fixed-income securities.

ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN (SMHB) and the older 2x-leveraged High-Yield ETN, ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN (NYSEARCA:SMHD) are based on the Solactive US Small Cap High Dividend Index. SMHB and SMHD could be called "self diversifiers" in the 2X-Leveraged High Yield ETN sector since the index upon which they are based has many of the components that are also in MORL, MRRL, REML and BDCL. See: Sell SMHD Yielding 21.5%, Buy SMHB Yielding 23.6% for additional information on these.

Federal Reserve tightening can hurt all financial markets simultaneously. Likewise, Federal Reserve ease can boost all financial markets simultaneously. I am still cautiously bullish on CEFL as a diversifier for my holdings of 2X leveraged high yield ETNs that are based on mREITs. CEFL and SMHB some of the few instruments in my portfolio that provide a very high yield and some ability to benefit from a rising stock market. Many of the policy risks that have arisen as a result of the 2016 election are now becoming more pronounced.

The January 30, 2019, statement by Federal Reserve Chair Powell that they are not planning any further rate increases, but that Federal Reserve could change that policy based on the data sparked a large stock market rally. As with much economic news, there are two or more interpretations with regard to the impact on financial markets. There was a benefit to securities prices from the belief that interest rates will be lower than had been the consensus view. There was also some concern that the Federal Reserve may think economic activity will not be as robust. Some data on retail sales has also suggested a slowdown.

New risks seem to occur with increasing frequency. The risk that the border with Mexico could be closed and thus jeopardizing $1.7 billion in trade every day was not a risk on my radar last week. The uncertainty of possible impacts from possible protectionism, federal budget deficits, political developments, possible overheating in the economy, and monetary policy suggests large fat-tail risks in both directions in the equity market and fixed-income markets. This would lead investors who have a significant portion of their portfolios in CEFL to consider adding MORL, MRRL, or REML to hedge against the risk of much weaker economic growth. This would enable them to maintain the high income that CEFL now delivers. Likewise, MORL, MRRL, and REML investors might want to consider adding CEFL or BDCL in order to hedge against a high real growth scenario. SMHB could be utilized by investors who want to only invest in one 2X leveraged ETN since it contains both interest rate sensitive components and credit risk sensitive components.

The yields on all of the high-yielding 2x leveraged ETNs like CEFL are still compelling. However, the uncertainty regarding economic variables means that significant event risks exist in addition to the risks inherent with the ETN's use of leverage. This is in addition to the leverage employed by many of the components that make up the indices upon which these ETNs are based. I am diversifying the large proportion of MORL, MRRL, and REML in my portfolio with some CEFL, SMHB, and BDCL since there is a possibility of much stronger economic growth than I expect.

At any time, there could still be a perception on the part of many market participants that there will be much stronger economic growth. This should be considered by shorter-term investors. If something catastrophic were to occur, like a financial crisis, severe protectionism or an oil shock, it would be expected that the stock market would decline sharply, but MORL, MRRL, and REML could do better as investors seek the safety of agency mortgage-backed securities and the Federal Reserve lowers interest rates. In view of the uncertainty and risks, active traders might consider waiting until the impacts of the Iran decertification, protectionism, federal budget deficits, and monetary policy on economic conditions become more clear. However, a lesson we can learn from the last few years is that waiting for price declines in high-yielding instruments like CEFL, MORL, MRRL, and REML can backfire, as the large dividends forgone by waiting exceeds the savings from a lower purchase price.

Since 2012, I have been willing to collect and reinvest the approximately 20% average yield on a monthly compounded basis that 2X Leveraged ETNs pay, while the ultimate answers to questions about the outlook for the economy and securities markets are revealed. I still am. When the yields rise on price declines, it has been a buying opportunity. My view for the last few years has been that there will likely be more reductions than increases in the Federal Funds rate during the next five years. Furthermore, the possibility exists that Trump's trade policies could precipitate a Lehman collapse like event. In a scenario like that, 2X Leveraged ETNs would be one of the better places to be. In Trump's Trade Policies: America's Brexit? risks related to protectionism are discussed in depth.

As was discussed in: Bank Issues Could Impact 20% Yielding ETNs, recently, a French court ordered Switzerland's largest bank to pay 4.5 billion euros ($5.1 billion) in fines and damages for helping wealthy French clients evade tax authorities. It is not inconceivable that zealous government authorities could impose such draconian fines and penalties, so as to cause the demise of one or more major financial institutions. That could impact the world economy in a way similar to the collapse of Lehman in 2008. More relevant is that UBS is the sole source of the interest and principal payments made by the ETNs it sponsors. The ETNs are notes and, thus, obligations of UBS.

That does expose the investor to some degree of credit risk. However, it is very different and of much less magnitude than the type of credit risk, one would face by buying a regular senior bond issued by UBS. If you were to buy a bond from UBS and something drastic happens causing UBS to be downgraded, to say BBB, you would suffer an immediate loss since the credit risk of the downgraded bond would be reflected in the market price. However, the net asset value of UBS redeemable ETNs such as MORL and CEFL would not be affected and because shares of the ETN can be redeemed at net asset value, the market price of the ETN would not be impacted either. Even if the ability to redeem shares did not exist, the UBS credit risk with MORL and CEFL would be normally rather small. USB has a relatively high percentage of their revenue from fees for managing assets, which is a much more stable revenue base than making loans, underwriting or trading securities.

I still tend to believe that the massive tax-policy-induced increase in inequality will cause increasing excesses of loanable and investable funds above commercially reasonable ways to utilize those funds. This will eventually result in an overinvestment cycle with a recession and that will, ultimately, be very good for the 2X Leveraged ETNs. There have been some policy proposals being put forth by some prominent Democrats, not considered populists, since the 2018 elections that might be of particular concern to investors in MORL, MRRL, and REML. As described in my 2013 Seeking Alpha article, "A Depression With Benefits: The Macro Case For mREITs," my macroeconomic rationale for investing in MORL - the only 2X-leveraged mREIT ETN in existence at that time - was based on the premise that government policies shifting the tax burden from the rich and onto the middle class results in more funds being available for investment relative to productive uses for those investable funds.

Recently, some prominent Democrats have gone from the vague advocacy of "making the very rich pay their fair share" to specific proposals to shifting the tax burden back on to the rich. Senator, announced presidential candidate, Elizabeth Warren (D-Mass.) is proposing an annual "wealth tax" on Americans with more than $50 million in assets. The tax would be 2% on the amount in excess of $50 million and 3% on amounts above $1 billion. Celebrity member of Congress, Alexandria Ocasio-Cortez (D-NY), is calling for a 70% top marginal tax rate on incomes above $10 million.

Whatever one thinks of the advisability of enacting legislation that reverses the massive shift in the tax burden away from the rich and onto the middle class, it could have negative implication for the financial markets. Since shifting the tax burden from the rich and onto the middle class results in there being more funds being available for investment, reversing that results in less funds being available for investment.

The probability of the 2020 election resulting in a change in the tax code that significantly reverses the massive shift in the tax burden away from the rich and onto the middle class is still very probably low as long as the Democrats continue to combine such tax proposals with plans to spend the proceeds on various social programs like free college tuition. However, a plan to raise taxes on those with assets above $50 million and/or incomes above $10 million and use all of the proceeds to reduce the taxes on everyone else might have a much higher probability of being enacted.

It is hard to envision the Democrats being politically savvy or ideologically flexible enough to embrace a policy of directly shifting the tax burden away from the middle class and onto the rich. The Democrats have generally been deluded in their belief that the current level of taxes on the middle class is politically sustainable. In Hillary Clinton's speech announcing her candidacy, she said that the middle class pays too much taxes. She never mentioned a middle class tax cut again. Presumably, due to pressure from Sanders, who pushed her to the left, which severely hurt her chances in the general election. Most Democrat politicians are not aware that by far the best thing government could do for most middle-class households would be to lower their taxes. Thus, in many cases, middle-class voters have been willing to grasp at any chance they think could lower their tax burden, and thus support candidates who promise them a tax cut, no matter how odious the candidates might be otherwise.

Taking all of this into consideration, I'm still a cautious buyer of 2X Leveraged ETNs and have added to them recently. It should be kept in mind that economic and policy uncertainty that seems to be diverging rather than converging. This means that significant event risks exist in addition to the risks inherent with the ETNs' use of leverage. This is in addition to the leverage employed by many of the components that make up the indices upon which these ETNs are based. Presently, CEFL offers a reasonable but expensive relative opportunity to diversify a high-yield portfolio with a very high concentration on mREITs. USOI, EDF and OXLC might also be considered as diversifiers or stand-alone investments as well.

CEFL Components and Contribution to the Dividend

Name

Ticker

Weight %

Price

NAV

Price/NAV

ex-div

dividend

frequency

contribution

Doubleline Income Solutions

DSL

4.49

20.15

19.94

1.0105

4/17/2019

0.15

m

0.009673

Nuveen Pfd Sec Income Fd

JPS

4.44

9.34

9.63

0.9699

4/12/2019

0.056

m

0.007704

Western Asset High Income Fund II

HIX

4.38

6.58

7.28

0.9038

4/17/2019

0.046

m

0.008861

First Trust Intermediate Duration Prf.& Income Fd

FPF

4.38

22.28

23.28

0.9570

4/1/2019

0.143

m

0.008107

Brookfield R A Incm

RA

4.37

21.85

23.6

0.9258

4/16/2019

0.199

m

0.011518

Aberdeen Total Dyn

AOD

4.28

8.46

9.5

0.8905

4/18/2019

0.058

m

0.008419

Western Asset Emerging Markets Debt Fund

EMD

4.2

13.88

15.5

0.8955

4/17/2019

0.1

m

0.008757

Blackrock Corporate High Yield Fund

HYT

4.17

10.5

11.73

0.8951

4/12/2019

0.072

m

0.008275

AllianceBernstein Global High Income Fund Inc

AWF

4.17

11.72

13.02

0.9002

4/4/2019

0.07

m

0.007198

Wells Fargo Advantage Income Opportunities Fund

EAD

4.16

8.01

8.97

0.8930

4/11/2019

0.059

m

0.008899

Liberty All Star Equity Fund

USA

4.16

6.26

6.59

0.9499

4/25/2019

0.17

q

0.032694

Blackrock Multi-Sector Income

BIT

4.13

16.71

18.6

0.8984

4/12/2019

0.117

m

0.008347

Blackstone /GSO Strategic Credit Fund

BGB

4.08

14.3

15.83

0.9033

4/22/2019

0.109

m

0.009

Eaton Vance Limited Duration Income Fund

EVV

4

12.7

14.58

0.8711

4/10/2019

0.067

m

0.006107

Prudential Global Short Duration High Yield Fund

GHY

4

14.14

16.27

0.8691

4/17/2019

0.1

m

0.008187

Prudential Short Duration High Yield Fd

ISD

3.98

14.44

16.54

0.8730

4/17/2019

0.1

m

0.007977

Tortoise Mlp Fund

NTG

3.77

14.18

14.99

0.9460

2/20/2019

0.423

q

Nexpoint Credit

NHF

3.71

21.21

24.23

0.8754

04/22/2019

0.2

m

0.010124

Cohen & Strs Infrstr

UTF

3.63

24.42

25.39

0.9618

4/16/2019

0.155

m

0.006668

Templeton Emerg Mkts Inc Fd

TEI

2.96

10.1

10.95

0.9224

4/12/2019

0.07

m

0.005945

Blackrock Debt Strategies Fund Inc

DSU

2.73

10.77

12.27

0.8778

4/12/2019

0.069

m

0.005025

Western Asset High Income Op

HIO

2.64

4.92

5.45

0.9028

4/17/2019

0.029

m

0.004503

First Trust High Income Long/short Fund

FSD

2.37

14.72

16.97

0.8674

4/1/2019

0.105

m

0.004892

Tortoise Energy Infr

TYG

2.14

23.5

24.22

0.9703

2/20/2019

0.655

q

Invesco Dynamic Credit Opportunities Fund

VTA

2.13

11.22

12.75

0.8800

4/11/2019

0.063

m

0.003434

Nuveen Fltg Rt Inc

JFR

1.67

9.83

11.18

0.8792

4/12/2019

0.062

m

0.003024

Invesco Senior Inc

VVR

1.52

4.32

4.83

0.8944

4/11/2019

0.021

m

0.002138

Kayne Anderson Mlp

KYN

1.44

15.77

17.24

0.9147

4/17/2019

0.12

m

0.003171

Eaton Vance Sr Fltg

EFR

1.06

13.3

15.04

0.8843

4/22/2019

0.077

m

0.001776

Voya Prime Rate Trst

PPR

0.85

4.81

5.56

0.8651

4/9/2019

0.028

m

0.001406

Disclosure: I am/we are long CEFL, REML, MORL, MRRL, BDCL, OXLC, EDF,,USOI, LMLP, AMZA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.