A High-Yield ETF Made Up of Closed-End Funds 

Closed End Funds, ETFs, High-Yield Investing, High-Yield Investments
by Tim Plaehn
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For my high-yield-focused Dividend Hunter newsletter, I tend to steer away from recommending closed-end funds (CEFs). I have been known to call CEFs the “junkyard of Wall Street.” Still, when I discovered the Amplify High Income ETF (YYY), I had hopes of finding a fund that would select the best in the CEF world. It currently yields 12%.

CEF shares trade on the exchanges and, unlike ETF shares, do not get any sponsor support. CEFs can trade at significant premiums or discounts to their net asset values (NAV). Most of these funds pay high dividend yields. Dividends can, and often are, a combination of earned income, realized capital gains, and return on capital.

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The CEF Connect website lists 397 closed-end funds. I believe it would be too much work to dig out the handful of diamonds from the pile of turds. This is where the Amplify High Income ETF comes in. Here is the fund objective from the website:

YYY is a portfolio of 60 closed-end funds (CEFs) based on a rules based index. The ISE High Income Index selects CEFs ranked highest overall by ISE in the following factors: Yield, Discount to Net Asset Value (NAV), and Liquidity. This investment approach results in a portfolio which contains a variety of asset classes, investment strategies and asset managers.

Sixty-two percent of the YYY portfolio is in stock funds, leaving 38% in bond funds. The holdings cover a wide range of categories.

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Since its launch in June 2013, YYY has not been able to avoid the typical drawbacks of CEFs. The primary negative has been a steadily shrinking dividend. The ETF paid $0.18 per share per month in 2013. A slow decline has left the monthly rate at $0.12 per share, representing a 33% decrease.

A falling dividend led to a decline in the share price. Between 2014 and 2016, YYY traded in the low $20s. Now it trades for less than $12 per share. As a result, and despite a double-digit dividend yield, YYY has posted an average annual return of 5.5%. Not what an investor looking at a 12% yield hopes for.

I was hoping that a smart selection of CEFs in an ETF would produce better returns. At least with YYY, that has not been the case.

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Author: Tim PlaehnTim is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory focused on creating a high-yield income stream and it's companion service The Dividend Hunter Insiders as well as Monthly Dividend Multiplier, a research service focused on dividend stocks using consistent dividend increases to drive capital appreciation. Most recently Tim has been delivering research on high-yield ETFs through his ETF Income Maximizer, ETF Income Edge, and ETF Income Trader research services. Prior to his work with Investors Alley, Tim was a stock broker, a Certified Financial Planner, and F-16 Fighter pilot and instructor with the United States Air Force. During his time in the service he was stationed at various military locations in the U.S., Europe, and Asia. Tim graduated from the United States Air Force Academy with a degree in mathematics. In his free time he tours the United States parks, campgrounds, and wilderness areas in his travel trailer.
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