Ron Rowland: UBS rolled out the ETRACS Diversified High Income ETN (NYSEARCA:DVHI) on Thursday, Sept. 19, 2013. The new exchange traded note (ETN) is targeted at investors desiring significant monthly income from a diversified multi-asset mix. It will track the new NYSE Diversified High Income Index minus the 0.84% annual tracking fee. The underlying index has a current yield of 7.7%, and the ETN will make monthly cash distributions.
The underlying NYSE Diversified High Income Index measures the performance of a diversified basket of 138 publicly-traded securities that historically pay significant dividends or distributions. Index features and construction aim to highlight income while seeking to reduce price volatility. The methodology incorporates minimum free float market capitalization, dividend yield, and liquidity while including asset class and sector weighting restrictions. The index rebalances quarterly to maintain the target sector weightings. The index was created Aug. 20, 2013, and therefore has only one-month of performance history.
Target sector allocations of the index are illustrated below and encompass a wide range of asset classes. The stock/bond allocations are nominally at 70%/30%, and international exposure is estimated at 11% of the equity exposure and 33% of the bond holdings.
The underlying index has 138 constituents with the largest allocations going to PowerShares Emerging Markets Sovereign Debt (PCY) at 10.0%, iShares iBoxx $ High Yield Corporate Bond ETF (HYG) at 9.9%, iShares US Preferred Stock ETF (PFF) at 7.0%, Market Vectors High Yield Municipal Index ETF (HYD) at 4.9%, Ares Capital (ARCC) at 4.2%, and Energy Transfer Partners LP (ETP) at 4.0%.
Analysis/Opinion: UBS has come a long way since the time nine of its 10 products were part of the January 2009 ETF Deathwatch. In past years, you could count on me to be highly critical of nearly every new ETRACS that came to market, such as my “Are You Ready for More E-TRACS?” article from November 2009. Today, I consider the UBS ETRACS lineup to be one of — if not the — most innovative and complete ETN offerings. DVHI reinforces my improved perception of the ETRACS brand.