More Candidates For The 15%+ Current Yield Portfolio

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Includes: AGNC, BDCL, CEFL, EDF, EDI, LBDC, LMLP, MORL, MRRL, ORC, OXLC, REML, SMHB, SMHD, USOI
by: Lance Brofman
Summary

Securities that have current dividend yields above 15% are discussed.

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

Many of 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.

I have written about 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, most options strategies 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 they might possibly benefit from adopting them. There is nothing magic about the 15%+ current yield threshold. Originally, in 2001, it was a 10% current yield threshold. It reached 30% in 2008 and 60% in March 2009.

The rules for this article, are that I did not make a determination that a particular security does not qualify for inclusion in the 15%+ current yield portfolio. However, if I had confidence that the security clearly did qualify for inclusion in the 15%+ current yield portfolio, I would have said so. As per the style of Robert S. Mueller III, I just present my findings and leave the reader to decide for themselves. I could not resist that.

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, I found that alone does not create the time necessary to research them as much as I would like.

The bulk of the new candidates for inclusion in the 15%+ current yield portfolio are the results of suggestions from readers of my Seeking Alpha articles. Given the 15%+ current yield constraint, 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. Thus, originally I focused only on securities with significant interest rate risk but not much credit risk.

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.

Higher short-term rates are unambiguously negative for the mREITs. Higher long-term rates are a two-edged sword for leveraged mREITs like AGNC Investment Corp. (AGNC). Higher long-term rates reduce the value of their mortgage portfolio and thus the book value of the shares. The other side of the two-edged sword is that higher long-term rates and lower prices of mortgage securities provide an opportunity for mREITs to reinvest the monthly principal payments they receive in higher-yielding mortgage securities. A highly leveraged mREIT with, say, 9-to-1 leverage and CPR of 11% would be generating new cash available for reinvestment from prepayments of principal each year approximately equal to the entire equity of the mREIT. The flip side of that two-edged sword is that lower long-term interest rates reduce the coupon income on new mortgage-backed securities bought by the mREITs. We are already seeing some dividend cuts resulting from that effect in the mREIT sector.

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.

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 May 31, 2019, CEFL has had a total return of 29.17% based on closing prices and assuming reinvestment of dividends. That is an average annual of 4.86% over that 5.39-year period. Over the same January 7, 2014, through to May 31, 2019, period, MORL has had a total return of 108.9%. That is an average annual of 14.63% over that 5.39-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 May 31, 2019, BDCL has had a total return of 50.47% based on closing prices and assuming reinvestment of dividends. That is an average annual of 6.46% over that 6.62-year period. Over the same October 17, 2012, through to May 31, 2019, period, MORL has had a total return of 102.42%. That is an average annual of 11.24% over that 6.62-year period.

The Need For New Diversifiers

Junk bonds now 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, at least in the near future. Increasing, most of the 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.

There are some securities now in the 15%+ current yield constrained portfolio, that had a current yield above the threshold at the time of purchase, but now have yields far below 15%. These have either risen in price very much, due to the perception by the markets that they have much less risk, or have defaulted and/or eliminated their dividend. There are still some corporate bonds in the 15%+ current yield constrained portfolio. Most have either risen in price to where the yields are far below 15% or are in or very near default. The only two corporate bond issuers I am now actively looking at are those from FRONTIER COMMUNICATIONS (FTR) such as the 11.0% 09/15/2025 which has a current of 17.5% at a price of 62.75. The yield to maturity on that issue is 22.273% as of May 31, 2019. The other corporate issuer is J. C. PENNEY CORP INC (JCP) 7.62500% 03/01/2097 which has a current yield of 28.6% at a price of 26.639. The yield to maturity on that issue is 28.555% as of May 31, 2019.

I generally have a buy and hold philosophy. I usually only sell securities out of the portfolio either to undertake arbitrage strategies, such as selling MORL to buy MRRL, see: Sell MORL, Buy MRRL and Sell SMHD Yielding 21.5%, Buy SMHB Yielding 23.6% or for personal financial considerations, when I have sold securities that are now far different from what was originally bought. These would typically be shares or warrants that I had received when companies were reorganized in bankruptcy.

Possible New Candidates for the 15%+ Current Yield Portfolio

In More Diversifiers For A 15%+ Interest Rate Sensitive Current Yield Portfolio, I discussed: InfraCap MLP ETF (AMZA), UBS ETRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN (LMLP) and Credit Suisse X-Links Crude Oil Shares Covered Call ETNs (USOI). I have determined that they do qualify for inclusion in the 15%+ current yield portfolio, and now own them. Previously, I had added ORCHID ISLAND CAPITAL INC (ORC), which now at a price of $6.08 and dividend yield of 15.8%, does qualify again.

The above-mentioned article also discussed Oxford Lane Capital Corporation (OXLC) and Stone Harbor Emerging Markets Income Fund (EDF). OXLC looks somewhat promising, with a 16.31% dividend yield 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 May 31, 2019, price was $9.93 and the most recent reported net asset value is $6.885 as of May 31, 2019.

EDF is another recent small purchase. It provides some diversification from the American economy and interest rates. Its' current yield is 16.55% based on the most recent price of $13.05. One concern is the steep premium over its recent $10.03 net asset value. Another concern with EDF is that about half its' dividend is from return of capital. I intend to do more research on EDF before taking further action. There are some other candidates that I am starting to look at.

STONE HARBOR EMERGING MARKETS TOTAL INCOME FUND (EDI) is similar to EDF. It has a current yield of 15% with a price of $12.09 and an annual dividend of $1.81. The net asset value is 11.06. Another concern with EDI is that about half its' dividend is from return of capital. I intend to do more research on EDI before taking further action.

Cornerstone Strategic Value Fund (CLM) maintains a managed distribution policy. The Fund will maintain a distribution rate as a specified percentage of its net asset value which is reset annually based on the Fund's net asset value in October. This results in a fixed, monthly distribution to shareholders being maintained. The current rate has been set at an annual rate of 21% of the net asset value. To the extent that these distributions exceed the current earnings of the Fund, the balance will be generated from sales of portfolio securities held by the Fund, which will either be short-term or long-term capital gains or a tax-free return-of-capital. The dividend for the last 12 months was $2.46 which is current yield of 21.48% with the May 31, 2019 price of 11.27. The dividend was comprised of about 95% return of capital and only 5% from earnings or capital gains. The net asset value was $11.06 May 31, 2019.

ETRACS 2xMonthly Pay Leveraged Preferred Stock Index ETN (PFFL) is fairly new, with a May 31, 2019 price of $24.52. For the 8 months it has paid dividends, they have totaled $1.6233. That is $2.435 on an annualized basis. This is a 9.93% current annualized yield. If the price declined so that the yield exceeded 15% It could qualify for inclusion in the 15%+ current yield portfolio. As with the other ETNs that can be redeemed at net indicative (value) in large amounts, it trades very close to net indicative (value).

Analysis of the June 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. NYG and TYG both had an ex-dividend date in May 2019. Thus, only USA will not contribute to the June 2019 CEFL dividend.

Wells Fargo Advantage Income Opportunities Fund (EAD) reduced its' monthly dividend to $0.0591 from $ 0.05921. AllianceBernstein Global High Income Fund Inc (AWF) reduced its' monthly dividend to $0.0655 from $0.06990. Eaton Vance Limited Duration Income Fund (EVV) increased its' monthly dividend to $0.07 from $0.0670. Templeton Emerging Markets Income Fund (TEI) reduced its monthly dividend to $0.0669 from $0.0701. From the data in the table below, I calculated a projection for the June 2019 monthly CEFL dividend of $0.225. The table shows the ticker, name, weight, dividend, ex-date, price, net asset value, and contribution to the dividend for the CEFL components that will contribute to the June 2019 dividend.

Conclusions And Recommendations

I am always looking for ways to diversify my portfolio within the 15%+ yield constraint. AMZA, LMLP, PFFL, USOI, OXLC, CLM, EDI and EDF were brought to my attention by readers, in comments to 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. BDCL also has an identical twin: the UBS ETRACS 2×Leveraged Long ETRACS Wells Fargo® Business Development Company Index ETN Series B (LBDC), which is very thinly traded.

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 and BDCL as a diversifier for my holdings of 2X leveraged high yield ETNs that are based on mREITs. BDCL also has an identical twin: the UBS ETRACS 2×Leveraged Long ETRACS Wells Fargo® Business Development Company Index ETN Series B (LBDC), which is very thinly traded. BDCL, CEFL and SMHB are some of the few instruments in my portfolio that provide a very high yield and some possible ability to benefit from a rising stock market that was due to stronger economic activity. Stronger economic activity usually tends to increase interest rates.

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.

Many of the policy risks that have arisen as a result of the 2016 election are now becoming more pronounced. New risks seem to occur with increasing frequency. The risk that news tariffs could be imposed on Mexico 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 and/or BDCL 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. 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, including LMLP. 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. LMLP, USOI, EDF and EDI 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

Nuveen Pfd Sec Income Fd

JPS

4.54

9.24

9.55

0.9675

5/14/2019

0.056

m

0.007759

Doubleline Income Solutions

DSL

4.47

20.08

20.03

1.0025

5/15/2019

0.15

m

0.009416

Western Asset High Income Fund II

HIX

4.39

6.56

7.21

0.9098

5/23/2019

0.046

m

0.008681

Brookfield R A Incm

RA

4.38

21.79

23.41

0.9308

5/14/2019

0.199

m

0.01128

First Trust Intermediate Duration Prf.& Income Fd

FPF

4.38

22.47

23.11

0.9723

5/1/2019

0.1425

m

0.007833

Aberdeen Total Dyn

AOD

4.35

8.02

9.06

0.8852

5/21/2019

0.0575

m

0.008795

Blackrock Corporate High Yield Fund

HYT

4.23

10.46

11.58

0.9033

5/14/2019

0.072

m

0.008211

Wells Fargo Advantage Income Opportunities Fund

EAD

4.22

8.05

8.9

0.9045

5/13/2019

0.0591

m

0.008737

Liberty All Star Equity Fund

USA

4.19

6.16

6.41

0.9610

4/25/2019

0.17

q

Western Asset Emerging Markets Debt Fund

EMD

4.18

13.74

15.48

0.8876

5/23/2019

0.1

m

0.008579

AllianceBernstein Global High Income Fund Inc

AWF

4.16

11.7

12.96

0.9028

5/2/2019

0.0655

m

0.006567

Blackrock Multi-Sector Income

BIT

4.13

16.94

18.41

0.9202

5/14/2019

0.1167

m

0.008023

Prudential Global Short Duration High Yield Fund

GHY

4.04

13.97

16.11

0.8672

5/16/2019

0.1

m

0.008155

Prudential Short Duration High Yield Fd

ISD

4.03

14.27

16.33

0.8739

5/16/2019

0.1

m

0.007964

Eaton Vance Limited Duration Income Fund

EVV

4.03

12.64

14.49

0.8723

5/10/2019

0.07

m

0.006294

Blackstone /GSO Strategic Credit Fund

BGB

4.01

14.57

15.77

0.9239

5/22/2019

0.109

m

0.00846

Tortoise Mlp Fund

NTG

3.7

13.68

14.58

0.9383

5/23/2019

0.4225

q

0.032225

Cohen & Strs Infrstr

UTF

3.69

24.12

25.86

0.9327

5/14/2019

0.155

m

0.006687

Nexpoint Credit

NHF

3.38

18.83

23.67

0.7955

5/14/2019

0.2

m

0.010124

Templeton Emerg Mkts Inc Fd

TEI

2.89

10.14

10.79

0.9398

5/14/2019

0.0669

m

0.005377

Blackrock Debt Strategies Fund Inc

DSU

2.73

10.75

12.16

0.8840

5/14/2019

0.0685

m

0.004906

Western Asset High Income Op

HIO

2.71

4.97

5.41

0.9187

5/23/2019

0.029

m

0.004459

First Trust High Income Long/short Fund

FSD

2.37

14.55

16.75

0.8687

5/1/2019

0.105

m

0.004823

Invesco Dynamic Credit Opportunities Fund

VTA

2.16

11

12.65

0.8696

5/14/2019

0.0625

m

0.003461

Tortoise Energy Infr

TYG

2.06

22.5

23.71

0.9490

5/23/2019

0.655

q

0.016911

Nuveen Fltg Rt Inc

JFR

1.72

9.91

11.07

0.8952

5/14/2019

0.0615

m

0.00301

Invesco Senior Inc

VVR

1.54

4.21

4.79

0.8789

5/14/2019

0.021

m

0.002166

Kayne Anderson Mlp

KYN

1.39

15.39

17.12

0.8989

5/15/2019

0.12

m

0.003056

Eaton Vance Sr Fltg

EFR

1.07

13.26

14.94

0.8876

5/23/2019

0.077

m

0.001752

Voya Prime Rate Trst

PPR

0.85

4.81

5.52

0.8714

5/9/2019

0.027

m

0.001346

Disclosure: I am/we are long MORL, MRRL, CEFL, BDCL, LMLP, ORC, AGNC, EDF,, AMZA, OXLC, USOI. 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.