High Income ETFs Are Getting Smashed

Thanks to a hit piece in Barron’s…

Early in the year, my boss Randall Forsyth wrote in this space about some pretty scary Pimco closed-end fund premiums. As investors scrounge too recklessly for yield, they paid $150 for $100 in assets in some cases, or even $175.
Yep, this problem is still around. Jacqueline Doherty reviews the CEF bidding in this weekend’s edition of Barron’s, finding that too many investors are still blinded by 6% or 10% distribution yields. “At best, these funds harbor risks that investors ought to know about and understand,” she writes. “A[t] worst, the high yields are luring buyers at the wrong moment, when the funds are in danger of falling sharply in value.”

Herewith the culprits, all of whom give investors fat distributions: Pimco High Income Fund (PHK) still trades at a 70% premium to net asset value. Pimco Global StocksPLUS & Income Fund (PGP) is at 68%. Pioneer High Income Trust (PHT) is 37% above NAV. All three funds are selling off by anywhere from 1.5% to 3.5% Monday in the wake of the article.

Those are extreme examples. The milder strain of the disease is everywhere, as Doherty explains. “Sixty-six percent of taxable bond funds and 73% of municipal-bond funds trade above NAV now, versus roughly 30% both a year ago and in 2006, before the financial crisis, according to Thomas J. Herzfeld Advisors, a closed-end specialist based in Miami Beach.”

It’s not as if investors can claim they didn’t know the dangers. Trouble has happened before. From the article:

The Gabelli Utility Trust (GUT) traded at a 70% premium to NAV just before it announced on Aug. 19, 2010, that it was reviewing its distribution policy. Investors rightly interpreted that to mean a reduction was coming. The shares tumbled to $5.58 by the end of that month, from $8.18, and the premium shriveled to 15%. The fund now trades at $8.03, a 42% premium. Gabelli Utility has returned 9.5% annually since inception in 1999, assuming dividends were reinvested.

This is happening.

Old fuckers in wheeled chairs are being flung into oncoming traffic, courtesy of out of control price to NAV valuations. Anyone remember the TVIX debacle?

Other high income ETFs getting hit include RCS, DSU, PCN, PTY, PFL, PFN.

This is the sort of carnage I do not appreciate. I like to leave the bond/income people alone. Next thing you know, they are on the teevee declaring “credit crises”– things of that nature.