High Yield Trap: Is the YYY ETF a Risky Bet on Bond CEFs?

Investors in New York, NY seeking high yields in a conservative manner may have come across the Amplify High Income ETF, designed to capture the high yields offered within closed-end funds space. This ETF distinguishes itself by maintaining a high exposure over bond CEFs compared to equities, making it a lower-risk option. The portfolio of this ETF is highly diversified with no leverage at the top level, appealing to those looking for a conservative investment approach.

The ETF’s portfolio consists of closed-end funds determined by a quantitative approach based on the ISE High Income Index, focusing on high yields, discounts to NAV, and liquidity. However, despite the appeal of a double-digit annualized yield paid monthly, the consistent dividends have not translated into high long-term returns, offering minimal positive real returns over time.

With an inception date in 2012, the YYY ETF charges a management fee of 0.5%, but the total expense ratio stands at around 4.6% due to the fees of the underlying funds held. Despite the fund’s approach of acquiring CEFs with an average discount of less than 5% to NAV, the expense ratio may be viewed as unattractive by some investors.

Furthermore, the ETF’s performance history since inception has not been particularly impressive, raising concerns about the strategy’s effectiveness in generating returns. Comparisons with other funds in the CEFs and bond-related exposures space highlight the challenges YYY faces in delivering value to investors.

As investors evaluate the risk-reward profile of bond CEFs in the current market environment, factors such as credit spreads, lack of buying of US treasuries, and potential inflation risks come into play. These considerations impact the outlook for YYY and similar products in the market.

Ultimately, the structural flaws in YYY’s strategy, combined with the broader market dynamics, suggest caution for investors considering this ETF. The historical performance and risk factors indicate the need for a critical assessment of the investment thesis before making decisions in the bond CEF space.