How does an ETF enter the $1 billion club these days? By offering appetizing income.
Four ETFs, all of them income-oriented, have crossed the $1 billion threshold in assets under management in the past few months, as investors continue to look for ways to gather hefty dividends and cut attractive coupons in an ongoing era of ultra-low interest rates.
Three of the funds are equity strategies designed around attractive dividend streams, and the fourth is an actively managed junk bond fund that takes on a bit more credit risk in exchange for higher yield. Three of the funds have come to market within the past five years, though one launched in 2006. In sum, the post-crash years of low rates have been good to funds focused on alternative income.
In many ways, the low rates—yields on 10-year Treasurys dropped to 2.63 percent on Monday from 3 percent in January—have fueled flows into risk assets like stocks and helped lift the S&P 500 Index to new records this year after it rose 32 percent last year. It’s up about 6 percent so far in 2014. Junk bonds too—the “equities of the fixed-income world,” have also benefited from the low-rate environment.
At the end of the day, $1 billion in assets means a fund has more than survived; it has thrived, and has become very liquid and relatively easy to trade.
Equity Or Fixed Income?
“What people need to recognize with respect to fixed income, at this point in the rate cycle, is wherever interest rates go from here, returns are going to be low,” said Michael Jones, chairman and chief investment officer at RiverFront Investment Group, in a recent interview with ETF.com’s Alpha Think Tank.
“So, do you need fixed income? It depends upon your ability to withstand the volatility that stocks are inevitably going to serve up,” added Jones.
In the broader ETF space, U.S. high-dividend yield ETFs are currently managing $65.5 billion, while $25.3 billion is in U.S. corporate high-yield ETFs, according to data compiled by ETF.com.
The four funds each crossed that $1 billion threshold of easy tradability sometime this year, and their assets under management are the:
4. $1.1 billion AdvisorShares Peritus High Yield ETF (HYLD | C) YTD Return: 6.2 percent
Launched in November 2010, HYLD is an actively managed fund tracking high-yield debt in the U.S. with a value bent. The fund eschews new bond issues for value in bonds traded in the secondary market.
Unlike similar funds, HYLD doesn’t have any baked-in diversification requirements, meaning portfolio exposure can sometimes concentrate in specific sectors and industries. Investors should also note that HYLD may also own ETFs—including leveraged and inverse funds—to boost returns or to hedge exposure.
The fund can be had for 1.25 percent a year, or $125 for every $10,000 invested.