Closed-End ETFs: New Leveraged High Yield Choice From ETRACS

new etfsETRACS, the fund brand from the Switzerland-based bank UBS, is gradually gaining popularity in the high income space. After launching multi-asset ETNs like ETRACS Diversified High Income ETN (DVHI) in September and ETRACS Monthly Pay 2xLeveraged Diversified High Income ETN (DVHL) in November, this issuer of exchange traded products has now come up with yet another leveraged product.

The new product will trade under the name of ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN – CEFL and give investors diversified exposure to the closed-end fund space (read: A Better Yield ETF? UBS Launches High Income ETN).

The market is likely to stay volatile in the coming months mainly due to taper concerns. In a worst case scenario, CEFL is capable of safeguarding investors against excessive market fluctuations by investing in a pool of assets that are not highly correlated. Also, awarding investors with a very high level of current income through a double-leverage approach is another positive for the product.

CEFL in Focus

This new note – launched on December 11 – looks to offer investors two times monthly compounded exposure to the ISE High Income Index. The index consists of a diversified portfolio of 30 U.S.-based closed-end funds. These component funds are chosen on the basis of their income yield, their discount from NAV and liquidity.

The product anticipates paying out roughly 19.0% in yield a year to investors, indicating its focus on income. Equity sector allocation covers almost 60% of the fund yielding about 9.56% followed by debt-driven funds (about 25.0%) yielding about 10%. The remaining 15% goes to several other high income asset classes (see all the ETFs in the CEF space here).

Since CEFL looks to track various funds, the information about the issuers of those funds is important. Eaton Vance takes up the top chunk (28.71%) while Blackrock (27.09%) and Nuveen (11.40%) form the subsequent two positions of the index.

Currently, CEFL’s top holdings include Eaton Vance Enhanced Equity Income Fund II, Eaton Vance Tax-Managed Diversified Equity Income Fund, and AllianzGI NFJ Dividend, Interest & Premium Strategy Fund – all accounting for about 4% plus share of the total.

Investors should also note that the product is structured as an ETN which carries an associated risk of the issuer’s credit worthiness. Further, being a high income product, the underlying bond holdings of the note do not posses very high credit rating, thus calling for higher default risks.

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