Today Global X is rolling out a pair of ETFs that use a quantitative approach to provide investors with income. The Global X TargetIncome 5 ETF (TFIV) and the Global X TargetIncome Plus 2 ETF (TFLT) both primarily invest in ETFs.
TFIV comes with an expense ratio of 0.77%, while TFLT charges 0.78%. Both funds list on the Cboe BZX exchange, which is owned by Cboe Global Markets, the parent company of ETF.com.
The two funds select their holdings from the same pool of ETFs, and can include any of the following funds in their portfolios:
- Global X SuperDividend ETF (SDIV)
- Global X SuperDividend U.S. ETF (DIV)
- iShares 20+ Year Treasury Bond ETF (TLT)
- iShares Core U.S. Aggregate Bond ETF (AGG)
- Xtrackers USD High Yield Corporate Bond ETF (HYLB)
- SPDR Blackstone / GSO Senior Loan ETF (SRLN)
- Schwab U.S. TIPS ETF (SCHP)
- Global X MLP & Energy Infrastructure ETF (MLPX)
- Global X U.S. Preferred ETF (PFFD)
- Schwab U.S. REIT ETF (SCHH)
- VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC)
2 Similar, But Different Products
The two funds are very similar. TFLT looks to provide investors with an annualized yield that is described as that of the U.S. 10-Year Treasury plus another 2% in yield once fees are subtracted. Meanwhile, TFIV looks to provide 5% annualized yield after fees, the prospectus says. Interestingly, the 10-year Treasury is currently offering a yield of nearly 3%, so the two funds are currently targeting the same level of yield, though TFIV’s goal is fixed and TFLT’s goal can shift over time.
“It’s really just two different options for investors, depending on whether they want a certain income above a risk-free rate or whether they’re looking for a certain amount of income on a monthly basis,” said Jay Jacobs, Global X’s head of research.
According to Jacobs, the portfolios typically hold five or six of the funds in their respective selection universes, with the weighting of any individual ETF capped at 20% at each quarterly rebalance. Weightings of individual ETFs in the portfolio are set at 5% increments, meaning that immediately after a rebalancing, a component ETF can be assigned a weight of 0%, 5%, 10%, 15% or 20%.
Jacobs notes that every quarter each portfolio undergoes an optimization process to increase the likelihood of hitting its target while limiting the risk level. That might mean shifting more into high-dividend equities or alternatives when interest rates are low, and simply taking on less risk when interest rates are higher. However, the prospectuses specifically say the funds are not guaranteed to hit their targets. Jacobs says the algorithm uses trailing data and that yields can be pretty stable, but if an asset class sees its yield drop significantly, or if an ETF lowers its distributions, that’s when a fund could miss its target.
The two new ETFs are designed as retirement tools for investors seeking income. “I think that’s the best fit for them, because it’s just so income oriented,” Jacobs said, noting that clients have been asking for this type of product for a while.
Contact Heather Bell at [email protected]