Show me a mutual fund company and I'll show you a successful monthly income fund hoovering up assets from investors.
Monthly income funds are one of the fund industry's biggest success stories, but they're close to invisible in the ETF business. While there's a growing number of monthly income exchange-traded funds, most are small enough to suggest investors don't know much about them. Let's fix that by introducing the small offering of ETFs paying income on a monthly basis.
What all monthly income funds have in common is that they mix a wide variety of income-producing sectors into a convenient mix that churns out income every month. They're ideal for people looking to convert retirement savings into retirement income, and for investors who appreciate the qualities of a portfolio tuned more for income than capital gains. Some of the biggest mutual funds in the country are all about monthly income. But the only monthly income ETF of any real size is the iShares Diversified Monthly Income ETF (XTR), which has about $760-million in assets.
Smaller but still significant in size is the BMO Monthly Income Fund (ZMI), with about $90-million in assets. Others in the category include First Trust Global Risk Managed Income Index ETF (ETP), with about $33-million in assets, and Purpose Monthly Income (PIN), with $29-million in assets.
Fees for all of these funds are a touch on the high side by ETF standards. PIN has a management expense ratio of 0.7 per cent, ZMI is at 0.62 per cent, XTR at 0.56 per cent. The still-new ETP should come in close to that level as well.
(Note: These funds all or mostly hold other ETFs. Expect to pay the published headline fee alone, with no additional costs from the underlying holdings.)
Each of these monthly income ETFs has a different investment mix and, as a result, differing yields and total returns (share price changes plus dividends). Globeinvestor.com shows XTR with the highest yield at 5.9 per cent, but also a cumulative three-year decline to March 3 of 2.1 per cent. ZMI's yield is lower at 3.9 per cent, but its cumulative three-year return is 7.6 per cent. A look at the holdings for both funds offers some explanation of this performance differential, while also highlighting the importance of checking what these funds hold before buying.
ZMI has more exposure to dividend-paying common shares than XTR, and less exposure to the weak-performing preferred share category. Unlike XTR, ZMI also has exposure to long bonds (they've done well, but are riskier than short-term bonds) and a covered call strategy, where selling call options helps augment the flow of income paid to unitholders. PIN and ETP have even more exotic mixes. Before buying these or any other monthly income ETF, study the holdings to be sure you're comfortable with them.