Investors looking to generate a little extra cash on the side can consider exchange traded funds that track closed-end funds.
For instance, the YieldShares High Income ETF (NYSEArca: YYY) offers a 8.75% 30-day SEC yield, the PowerShares CEF Income Composite Portfolio (NYSEArca: PCEF) has a 7.58% 30-day SEC yield and Market Vectors CEF Municipal Income ETF (NYSEArca: XMPT) shows a 6.0% 30-day SEC yield, or a 9.94% taxable equivalent for the highest income bracket.
Closed-end funds, or CEFs, are a type of publicly traded company that raised a fixed amount of capital through an initial public offering and trades like a stock on an exchange. However, the CEF only raises a certain amount of capital once through an IPO, so the fund can show steep discounts or premiums to its net asset value.
Recently, CEFs have been trading at an average discount of 4%, so investors were able to purchase the assets at pennies on the dollar.
Many CEFs generate high yields by utilizing leverage, writes Stan Luxenberg for TheStreet. While leveraging assets can bolster returns, investors should be aware that the strategy can also magnify losses if the markets sour.
YYY consists of 30 CEFs picked out based on fund yield, discount to net asset value and liquidity. The CEFs in the portfolio have an average 5.9% discount
“If you buy funds with larger-than-average discounts, you have a chance to obtain capital appreciation,” Christian Magoon, CEO of YieldShares, said in the article.
The discount has helped YYY generate a 2.5% return over the past year, along with its robust yield.
PCEF includes closed-end funds that invest in taxable investment grade fixed-income securities, taxable high yield fixed-income securities and others utilize an equity option writing (selling) strategy. Specifically, the ETF holds 20.6% in high yield bonds, 46.5% in bonds and 32.9% in option income.
The high-yield income space helped offset losses in the investment-grade category last year.
Meanwhile, the option strategy also helped augment yields, but the strategy misses out on the stock market’s upside during a rally. [Covered Call ETFs: Less Bad While Damping Volatility]
The PowerShares ETF has gained 1.4% over the past year. Underlying holdings have discounts of more than 5%.
XMPT provides access to municipal CEFs. Jim Colby, senior municipal strategist of Market Vectors, points out that muni funds can enhance yield due to discounts and leverage. [Competitive Yields with a Short-Term Muni Bond ETF]
“The yields of closed-end municipals are extremely attractive compared to Treasuries or other taxable bonds,” Colby said in the article.
The Market Vectors ETF is up 6.3% year-to-date but it is down 9.9% over the past year.
For more information on dividends, visit our dividend ETFs category.
Max Chen contributed to this article.