There are also four exchange-traded notes issued by UBS Global Asset Management that are focused on BDCs, two of which are leveraged.
Elsewhere, there are a half-dozen ETFs that target closed-end funds. Their expense ratios range from 1.8% to 2.8%, and their 30-day SEC yields start in the 3% to 4% range for the two products focused on municipal bonds and run as high as 9.74% for the Saba Closed-End Funds ETF (CEFS).
Portfolio Fit
Regarding the VPC fund from Virtus and its hybrid nature that straddles equity and fixed income, one of the questions Smalley gets from financial advisors and individual investors is where exactly does this fit into an investment portfolio?
“It depends on the lens in which risk and expected returns are viewed from the end investor,” he says. “If you have an income objective within your overall personal investment objective, it shouldn’t much matter if it’s coming from equity or fixed-income sources. It’s mostly about the reliability of the dividends you’re receiving from those funds and the risk you’re taking to generate that kind of yield.”
That said, Virtus positions VPC as an income play. VPC’s underlying index methodology specifically screens for BDCs and closed-end funds with demonstrated consistent dividend payments over a three-year period. Constituents are weighted according to dividend yield.
“The primary objective of using VPC would be for high income,” says Smalley, who acknowledges this product often requires education in how to properly deploy it in portfolios.
“We’re talking about non-traditional income solutions as a package," he explains, alluding to several non-traditional income ETFs offered by Virtus that target areas such as senior loans and preferred stocks.
“You can combine these non-traditional income assets and put together a higher-yielding portfolio that spreads the risk in different places,” Smalley says. “We counsel the importance of diversifying your risks.”