ETF Talk: New Fund of Funds Focuses on High Yields

High-yield investments include heightened risk but one way to mitigate potential fallout is through diversification. A new “fund of funds” ETF now is available that offers diversification by investing in a number of high-yield, closed-end funds.

PowerShares CEF Income Composite Portfolio (PCEF), just launched Feb. 19, is designed to invest in more than 70 high-yield, closed-end funds, with the intent of paying a lofty dividend yield. To my knowledge, this new exchange-traded fund (ETF) is the first high-yield instrument to be structured as a fund of funds.

The ETF, based on the S-Network Composite Closed-End Fund Index, is designed to invest 80% of its total assets in the securities of funds that are included in the index. The index currently consists of closed-end funds that invest in taxable, investment-grade, and fixed-income securities.

The fund’s diversification across assets, strategies and managers is expected to help to mitigate specific risks. At the same time, the fund is intended to produce an average rate of distribution that is competitive with or higher than many other fixed-income investments. In addition, the ETF uses a weighting methodology that assigns greater portions of its holdings to closed-end funds that are trading at discounts.

Intra-day trading lets investors buy and sell shares of closed-end funds just as they do with other publicly traded securities. When the shares of closed-end funds trade at prices below their underlying NAVs, such funds are considered to be trading at a discount and offer investors a chance to enhance their return on investment by buying the shares at bargain prices to produce heightened yields.

If you are like me, you like bargains and high yields. This fund is supposed to give you both. Until the new ETF establishes a track record and boosts its average daily trading volume above 100,000 shares, I’ll avoid recommending it. However, if you do not mind buying a fund early in its existence, in hopes it will gain traction quickly, PCEF is an ETF that you may want to consider, especially if you like high-yield investments that offer diversification.

As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to reach out to me via email if you have one. To send a question to me, simply click here. You may see your question answered in a future ETF Talk.