Many of my favorite high-yield plays are exchange-traded funds (ETFs), which are becoming more and more popular among high-net-worth investors in particular. And it’s easy to see why — they offer dividends, liquidity and a professional money manager at the helm to do all the work of finding the right blend of holdings.
Like a more conventional, open-ended mutual fund, these closed-end ETFs are made up of a basket of various securities — typically both stocks and bonds — that are carefully balanced to generate a certain targeted income. Because they often have hundreds of holdings in various sectors and asset classes, these funds make it much easier to diversify your portfolio.
There really is a beauty in non-correlating assets. And I’m in the business of finding things that offset each other, as we’re in an economy that’s seesawing between growth and no growth, the Fed stepping on the gas and then the next moment talking about stepping on the brake.
At times like these, you really want to have investments that are taking advantage of the stock market while not fully abandoning the bonds. You want to have commodity exposure in case the dollar drops, you want inflation exposure, even some deflation exposure, different kinds of debt class exposure, and global exposure. All of that is important to more or less just maintain an even keel.
It can be enough to make your head spin — but, as I said, these ETFs’ managers are drilling down into all of this for you. An investor’s only job is to do the homework and pick the best funds … and that’s where I come in. Here are my top two ETFs that income investors should purchase this week.
Guggenheim Strategic Opportunities Fund (GOF)
Guggenheim Strategic Opportunities Fund (GOF) is a high-quality, diversified fund that maintains a large portfolio of asset-backed, corporate and fixed-rate loans offset by its largest holdings in the SPDR S&P 500 ETF Trust (SPY) and the SPDR Dow Jones Industrial Average ETF (DIA), together making up 10% of the overall portfolio.
A lot of GOF’s portfolio is fixed income, but the managers do lighten up on bond positions and move into more floating-rate or economically sensitive income-bearing positions when necessary. That being said, we’re talking about a gradual process: A lot of these big funds like to maintain a 50/50 balance, because they’re not big believers in making wholesale changes just to satisfy short-term gratification.
It trades close to net asset value (NAV), which I like to see when considering an initial entry into an ETF. Right now, GOF is trading at a premium of just 7% while maintaining a monthly payout of $0.182, for a 10% current yield. The distributions have not been a return of capital, either; it all comes from income and long-term gains. By and large, I really prefer these monthly payers that offer stability of principal as well.
Gamco Global Gold Natural Resources & Income Trust (GGN)
Picking bottoms in the gold market can be done, but it’s not easy — kind of like trying to catch a safe. But gold has retreated from $1,700 to $1,300 per ounce and, after a year of sideways consolidation, is showing signs of bullish activity not seen since the 10-year Treasury note yield challenged 3% in late December and then again in March.
So this scenario leads back to my favorite precious metals and natural resources ETF. Gamco Global Gold Natural Resources & Income Trust (GGN) is trading today at $11 and sports a yield of 9.9% while trading at just a 3.3% premium to NAV.
The fund pays monthly under a managed distribution program that generates income via a covered-call strategy. The portfolio has a market cap of $1.2 billion and has 91 holdings consisting of companies like Goldcorp (GG), Newmont Mining (NEM), Anadarko Petroleum (APC) and Yamana Gold (AUY). Turnover is about 52% as stocks are called away and have to be replaced.
The monthly dividend has held steady at 9 cents, with the ex-dividend date falling in the middle of each month. While this fund used to be primarily just precious and base metals, it now has a heavy weighting in oil and gas exploration, development, refining and oil field services as well.
As of June 30, GGN consisted of 51% energy and 35% metals and mining. It’s a very well-diversified fund that should play well into the domestic energy boom while affording a strong inflation kicker in the event that the “noise” becomes something louder in the months ahead.
Between GOF and GGN, you’ll be well on your way toward building your own “fund of funds” within your portfolio — a kind of hedge-fund approach to income investing. With holdings in energy, corporate debt, gold and the major U.S. index funds, these ETFs make a great complement to your existing dividend holdings.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and up to 4x greater income.