ALTY Reshuffled: Higher Yield, Lower Fee, But Still Unattractive

Summary

  • ALTY is a high yield ETF providing monthly distributions.
  • It has changed names and underlying indexes in September 2021.
  • Total management fees were drastically cut, but the risk of capital decay remains.
  • Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

Slippery path in winter with caution sign

ermingut/E+ via Getty Images

ALTY facts and portfolio

The Global X Alternative Income ETF (NASDAQ:ALTY), previously known as Global X SuperDividend Alternatives ETF, is a high yield fund paying monthly distributions with an annual distribution yield of 7.03%. It was launched on 07/13/2015 and tracks the Indxx SuperDividend Alternatives Index, a rule-based strategy mixing different categories of securities. The name, index and strategy have changed since my review of April 2021. Changes were effective on 9/28/2021. It was and still is mostly a fund of funds.

According to Global X ETFs website, the index offers an exposure to five asset categories: Infrastructure/MLPs, real estate, preferreds, emerging market bonds and covered calls. For the real estate, preferreds, emerging market bonds and covered calls parts, it just holds other ETFs by the same firm: Global X SuperDividend REIT ETF (SRET), Global X U.S. Preferred ETF (PFFD), Global X Emerging Markets Bond ETF (EMBD), Global X NASDAQ 100 Covered Call ETF (QYLD). For the infrastructure/MLPs part, it invests directly in MLPs and shares of infrastructure companies. The five categories are equally weighted at 20% at each annual reconstitution. They may be rebalanced quarterly if any one of them deviates more than 3% from its target weigh. It has a total of 20 holdings.

In the previous version of underlying index, it was holding the same real estate ETF, about 13 closed-end funds and 30 stocks of infrastructure and asset management companies. The new structure eliminating CEFs resulted in cutting the total expense ratio from 2.8% to 0.5%, which is a significant improvement.

Components

Past performance is irrelevant after such a strategy change. Moreover, some constituents have recent inception dates, so a simulated portfolio would not be a great help.

The major red flag in the previous version of underlying index was capital decay: the annualized return reinvesting all distributions, without paying any tax on them, was below the distribution rate. It was confirmed by ALTY share price history (without dividend). Let’s have a look at share price charts of the new constituents of ALTY since their inceptions:

SRET share price without dividends

SRET share price without dividends (TradingView on Seeking Alpha)

PFFD share price without dividends

PFFD share price without dividends (TradingView on Seeking Alpha)

EMBD share price without dividends

EMBD share price without dividends (TradingView on Seeking Alpha)

QYLD share price without dividends

QYLD share price without dividends (TradingView on Seeking Alpha)

The next one (MPLX (MPLX)) is not a real portfolio holding. I take it as a proxy for the infrastructure/MLPs part.

MPLX share price (without dividends)

MPLX share price without dividends (TradingView on Seeking Alpha)

So all ETFs held by ALTY have suffered a capital decay since inception. The infrastructure/MLPs part, simulated by MPLX, is close to flat. The new ALTY is likely to suffer from capital decay, but probably less steep than the old version.

Capital decay also means income stream decay: the yield cannot go up continuously to offset the loss in asset value. The full picture for an income-seeking investor is not pretty, considering the current inflation rate and the tax paid on distributions.

This issue is not specific to ALTY: securities with yields above 6% suffer from capital decay. The 10-year average annualized return including dividends of all ETFs with a yield superior to 6% is 4.5% … for an average yield of 8.8%! The 10-year average annualized return including dividends of all Russell 1000 stocks with a dividend yield superior to 6% is 5.9%, for an average yield of 8% (data calculated with Portfolio123).

ALTY managers have improved their product with the new version by drastically reducing the total expense ratio. However, they can’t do a miracle with high-yield holdings. The issue with high-yield funds is not the offer, but the demand. Ill-informed income seeking investors buy them without understanding capital decay and its consequences. ALTY may be used as an instrument for swing trading or tactical allocation, but it should not be part of a sustainable retirement plan. This is true for a number of high-yield instruments, not only this one.

A solution to get high yields without decay

Capital and income decay is also a structural issue in many closed-end funds, like in most high-yield instruments. However, it is not inexorable if one knows how to trade CEFs instead of using them as buy-and-hold instruments. I designed a 5-factor ranking system statistically related to forward returns across the full CEF universe, and started publishing the 8 best ranked liquid CEFs in Quantitative Risk & Value (QRV) after the March 2020 market meltdown. The list is updated every week. Its average dividend yield varies around 7-8%. It is not a model portfolio: trading the list every week is too costly in spreads and slippage. Its purpose is helping income investors find funds with a good entry point. The table and chart below show the hypothetical example of starting a portfolio on 3/25/2020 with my initial “Best 8 Ranked CEFs” list and updating it every 3 months since then, ignoring intermediate updates to limit transaction costs. Returns are calculated with holdings initially in equal weights without rebalancing until the next 3-month update. Dividends are reinvested at the beginning of every 3-month period.

Since 3/25/2020

Total Return

Annual Return

Drawdown

Sharpe ratio

Volatility

Best 8 CEFs quarterly

164.44%

65.98%

-9.91%

2.55

16.24%

SPY

99.87%

43.45%

-9.73%

2.08

16.05%

Best CEFs list performance

Best CEFs list performance (chart: author, data: portfolio123)

Dates and lists can be checked in QRV post history. Past performance is not a guarantee of future return.

I don’t expect the “Best 8” list to beat SPY like it did in the past 22 months, but a discount-driven rotational strategy in CEFs has a much better chance to protect both capital and income stream against erosion and inflation than any high-yield passive investment like ALTY.

In these uncertain times, Quantitative Risk & Value (QRV) provides you with risk indicators and data-driven, time-tested strategies. Get started with a two-week free trial now. 

This article was written by

Fred Piard profile picture
14.44K Followers
Data-driven portfolios and risk indicators.
Author of Quantitative Risk & Value and three books, I have been investing in systematic strategies since 2010. I have a PhD in computer science, an MSc in software engineering, an MSc in civil engineering and 30 years of professional experience in various sectors. My aim is making simple and efficient quantitative investing techniques available to my followers. Quantitative models can make investment decisions faster, reproducible and emotionless by focusing on relevant information in the middle of market noise. Moreover, models can be refined to meet specific risk tolerance and objectives. 

Step up your investing experience: try Quantitative Risk & Value for free now (limited offer).

I am an individual investor and an IT professional, not a finance professional. My writings are data analysis and opinions, not investment advice. They may contain inaccurate information, despite all the effort I put in them. Readers are responsible for all consequences of using information included in my work, and are encouraged to do their own research from various sources.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Recommended For You

Comments (2)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.