More than 100 exchange-traded funds have come to market this year. As is the case with any year’s crop of new ETFs, some funds get off to an impressive start, while other rookie funds struggle out of the gate. In some cases, it’s easy to tell right away that these new ETFs aren’t long for the world.
Then there is a third category of new ETFs — the “jury’s still out” category. These are new ETFs that can go either way. Boom or bust. The Global X SuperDividend Alternatives ETF (ALTY) belongs in that category.
ALTY debuted last week and, in many respects, it’s an example of a “right place, right time” ETF. Sure, there’s ample chatter about the Federal Reserve raising interest, but even so, U.S. interest rates will still be low by historical standards and nowhere close to what many market observers consider “normal.”
Which is to say that any ETF that offers investors an outsized yield (with asset classes beyond the usual fare) is bound to find a receptive audience. ALTY takes income generating to another level, offering investors exposure to business development companies, private equity, closed-end funds, covered-call funds and other asset classes.
Because ALTY is new, yield information on the fund isn’t yet available, but it is safe to say ALTY’s yield will tempt. After all, ALTY’s largest holding is a 26.3% weight to the Global X SuperDividend REIT ETF (SRET), an ETF that carries a 30-day SEC yield of almost 8.2%, according to Global X data. Throw in ALTY’s combined exposure of 27.6% to BDCs and master limited partnerships — high-yielding asset classes in their own right — and it’s not a stretch to say ALTY’s yield will be significant.
With a whopping 3.03% annual expense ratio, $303 for every $10,000 invested, ALTY reminds us that there is no such thing as a free lunch on Wall Street. To put it another way, that’s about five times the ETF industry average and, in some cases, six to 10 times higher than the annual fees on some of the more prosaic dividend ETFs we’ve recently highlighted.
A 3% return is measly, but a 3% fee is a lot to contend with. That means an investor that holds ALTY for a year on flat performance will see his or her $10,000 drop to $9,700, breaking even if ALTY gains more than 3%.
ALTY’s concept is not without merit. This is a multi-asset fund at its core, which is a genre of ETFs that has been widely embraced by investors. For example, the Guggenheim Multi-Asset Income Index ETF (CVY) and the First Trust Multi-Asset Diversified Income Index Fund (MDIV) have $741.33 million and $1 billion in assets under management, respectively. The difference is CVY and MDIV charge 0.84% and 0.67% per year.
There is another issue to consider, however. Regardless of cost, multi-asset ETFs can be vulnerable to rising interest rates because they hold bonds and other rate-sensitive asset classes.
And while 10-year Treasury yields have climbed around 30% over the past six months, MDIV and CVY are off an average of 5.4% over that period.
With big BDC and REIT allocations, ALTY may not be immune to that trend.
