ETF Talk: New Fund of Funds Targets High Yields

Doug Fabian Fabian.com

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

PowerShares CEF Income Composite Portfolio (PCEF), 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 anything like me, you really appreciate 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 want a high-yield investment that offer admirable diversification.

Doug Fabian is best known as the ETF expert and for his trend-following timing system known as the Fabian Plan that has helped investors make double-digit annualized returns since 1977. He is the editor of two financial newsletters, his flagship advisory service Successful Investing and High Monthly Income, as well as the weekly trading service, ETF Trader, and his weekly e-letter, Making Money Alert, all published by Eagle Publishing. He is also the radio talk show host of the syndicated show Doug Fabian's Wealth Strategies. He has helped his readers and listeners successfully navigate bull and bear markets for more than 30 years. He often appears on CNBC, CNN, FOX News, and the Money Show, and he has also been featured in The Wall Street Journal, USA Today, The New York Times, Fortune, Smart Money, and Barron's.