YieldShares On How to Invest For Income Through ETFs

YieldShares founder and CEO, Christian Magoon, spoke with Benzinga about investing for income through ETFs.

The company sponsors the YieldShares high income ETF Exchange Traded Concepts Trust YYY, which seeks to provide results corresponding to the performance of the ISE High Income Index. Currently, the fund has a 30-day SEC yield of 8.35 percent.

Following is part one of a two-part interview.

In part one, Magoon explains how to invest for income through exchange-traded funds.

Related Link: Closed-End Fund ETFs Follow High-Yield Bond Path

Benzinga: What are some factors that come into play when investing for income through an exchange-traded fund?

Christian Magoon: I think the first consideration is what do you want to own to generate the income? Is it bonds or stocks? How do those respective assets perform?

The second thing is understanding the amount of income being generated. Most products will have a 30-day SEC yield. That's the apples to apples number that the Securities and Exchange Commission has income-paying funds produce on their website and in their literature.

That's really a good way of comparing income from a dividend stock ETF to a bond ETF using the same kind of formulaic calculation.

Also, I think it's important for an investor to understand what the distribution schedule of the fund is. Some are quarterly, some are monthly, some are once a year.

I also recommend looking at the actual past distribution, the actual dollar amounts of the distributions.

Understand how variable those distributions are. Sometimes you'll see a fund pay on a monthly basis and on the quarter end months the distribution might be 50 to 60 percent larger than a month that's not a quarter-end month.

BZ: In terms of distribution, month versus quarter probably being the most common, is there any consensus on which is preferred?

CM: It seems to me investors like distributions that are more frequent, almost like a paycheck. In general, they prefer monthly distributions.

There's also a group that would rather not see big fluctuations in that monthly distribution number; so they say, "Well, I'd rather know I'm getting more of a balanced number four times a year than four large payments and eight quite a bit smaller payments."

Those investors prefer quarterly distribution.

BZ: What's the profile of the typical "income" investor?

CM: Investors investing for income tend to be in the later stages of their life.

For the first time, they're trying to live off investment income, because their whole life they had a steady paycheck.

I think it's a growing demographic moving from a portfolio that's accumulating to a portfolio that's distributing. That's a huge adjustment.

I think this provides opportunity for increased product development. At some point, there'll be more ETFs or funds that I call "outcome" ETFs, where they generate an outcome of certain payouts.

BZ: More like an annuity?

CM: Yeah, something where the goal is to generate 2 or 3 percent above inflation.

Something like that.

BZ: What are some red flags investors need to consider when investing for income through ETFs?

CM: I think one trap or red flag would be whenever you get into income investing, you see people flock to the highest income ETFs that are out there.

There is no free lunch in investing. When you're seeing higher income securities, ETF funds, generally there's probably some increased risk that you're taking on to get that income.

On the other hand, high income isn't bad per se. It could be part of a diversified portfolio.

A red flag is when somebody has most of their income being produced by one asset class, or one type of security. You really want to have diversification.

Whether that's different types of bonds, bonds and stocks, different types of stock strategies, maybe everything from a dividend ETF to maybe a BuyWrite or an Option ETF.

Related Link: YieldShares High Income ETF (YYY) Pays December Distribution

BZ: Any other red flags for income ETF investors?

CM: One other thing I'd mention is that there are exchange-traded products out there.

I call them exchange-traded products, not funds, because they're structured as exchange-traded notes, where you can buy 200 percent leveraged income products.

You might be able to get twice the yield of a traditional ETF because they're employing leverage, but again that means that the NAV (net asset value) of the fund could go up by two times or go down by two times.

Coming soon in part two, Magoon discusses YieldShares unique High Income ETF and how it generates income through investing in closed end funds.

At the time of this writing, Jim Probasco had no position in any mentioned securities.