As the quest for yield by investors continues, new U.S. exchange traded fund provider Arrow Funds is showing that it is willing to go anywhere, including Venezuela, to give investors what they want in the new Arrow Dow Jones Global Yield ETF . This is a multi-asset class fund with equal 20 per cent weightings to global corporate debt, global sovereign debt, global equity, global real estate stocks and global alternative. The global alternative segment is comprised of master limited partnerships and Canadian royalty trusts.
Within each of the five segments there are 30 holdings and each of the 30 has an equal target weighting. Arrow reports that the yield of the index is 7.43 per cent, which after accounting for the 0.75 per cent expense ratio should put the yield in the mid sixes. It is worth mentioning that ETFs do not always yield what they should. This can be due to rapid growth in assets managed by the fund; in the case of GYLD, it is because dividends paid by foreign companies tend to fluctuate more than with U.S. companies.
Arrow very usefully provides the yield of each of the five segments, which breaks down as follows: corporate debt yields 7.88 per cent, sovereign debt yield 9.09 per cent, equity 5.82 per cent, real estate 6.45 per cent and alternatives yields 7.91 per cent. The 9 per cent from the sovereign tranche is eye-popping, but it should be noted that in addition to Venezuela, this segment is heavily weighted to countries like Ireland, Hungary and Spain, so fund holders will be taking on credit risk.
There are also risks with the equity exposure. These segments are not made up of names like Consolidated Edison and AT&T. As one example, Navios Maritime Partners , is a cargo container company that currently yields 12.3 per cent. At one point in 2008, the stock was down 82 per cent. Another 2008-style meltdown is a very low probability, but it sets an expectation of the potential volatility the fund might have the next time there is a large decline in global markets – even if that next large decline is not as steep as in 2008.
The above risks don’t necessarily mean the fund should be avoided. It is important to understand how a fund might work; as long as the market continues to go as it has for the last couple of years, this fund can do well and payout an attractive yield.
It would be wise to have some sort of exit strategy in conjunction with owning this fund. Obviously some sort of stop order could work, but this could result in a sale at a low after some sort of very brief market scare.
A better exit strategy would be along the lines of selling the fund, if it goes below its 200-day moving average, or if the fund’s 50-day moving average goes below its 200-day moving average. The idea here is that a breach of the moving average signals a problem with demand for the fund, or more correctly, the holdings underlying the fund, while not being subject to the noise that might be caused by one bad week.