YYY (Yieldshares High Income ETF) is an ETF of closed-end funds (CEFs) split among the various CEF sectors. Roughly speaking it is composed of fixed-income and dividend funds so first-order sensitivies will be to treasury yields and equities.
What makes today an interesting day for YYY? Today both yields and equities are lower which means that one would expect YYY to be mostly unchanged while the basket constituents have relatively dispersed returns.
Is this a good day for YYY? We are tempted to say yes – bonds are up, equities are down – net the position is flat and we are just clipping coupons. However, as with anything, if we look under the hood a few key questions come up:
- Why are some equity funds up and bond funds down in the breakdown below? This seems to run counter to the macro asset performance we just highlighted.
- How likely are we to have a day when both bonds and equities are down? What happens if we see inflation push up wages and corporate margins or if the Fed makes a mistake to the dovish side and loses the grip on rates? What if Trump tries to bring back his talk of “discounts” or the Democrats try to play hard ball on the debt ceiling negotiations? Are there structural market shifts towards a negative correlation between yields and stocks?
- YYY tries to be clever by selecting a diversified basket of funds ranked by yield, discount and liquidity. It does not try to allocate across the maximum number of sectors and it does not take into account any of the portfolio allocation methods that take volatility into account which means that investors may end up holding a portfolio skewed in risk toward just a few funds.
All of these are interesting questions and particularly relevant to investors who keep an eye on volatility, yield sustainability and drawdown control. As we always say – details matter! All of these we will review in future blogposts and in the newsletter. Till then.