Everybody’s looking for income right now. With rates at ultra-low levels, the Wall Street machine has kicked into high gear. They are manufacturing income products as quickly as their fevered minds can dream it up.
These income products will all sound wonderful. You will hear about various exchange-traded funds (ETFs) that can turn your assets into a meaningful stream of commission dollars.
ETFs are the new wonder drug of investing. You can own an asset class with just a click of a button. Then just sit back and let the cash roll in by the bucket.
The problem with ETFs right now is that, unless you are willing to own a lot of oil-related assets and pile on a bunch of leverage, you simply will not get the level of income you need.
We are not opposed to oil-related assets, but we are very picky and prefer to use a “rifle” approach to MLPs and other energy investments. This beats a “shotgun” own-them-all strategy of ETFs.
We are also unlikely to buy them when oil has rallied by 17% in just the last month.
Here’s where income investors should look instead.
Why Income ETFs Today Fall Short
If you look at high-yield bond ETFs, there is no way you can make a case for owning low-credit bonds at yields of 6% or less.
Valuing bonds on the yield spread over the Treasury is ridiculous when the Fed has Treasury bonds pinned to the floor like Hulk Hogan had Andre the Giant.
Lower-credit bonds should have much higher yields right now.
High-yield bond ETFs have another massive risk no one talks about.
If we get a sell-off in high-yield markets, fund managers will have to sell bonds based on their presence on the underlying index.
There will be no buyers.
Vulture investors have been raising money to exploit the inevitable high-yield sell-off for a couple of years now.
It is a matter of when, not if.
This type of uninformed forced selling can happen in all index ETFs, but it’s worse in the illiquid high-yield bond markets.
Income investors should instead turn to the closed-end fund market. When investors sell closed-end funds, they sell their shares on the exchange. Portfolio managers do not have to rearrange their portfolios at all.
The best fund managers use the weakness in an asset class to increase their positions at bargain prices.
Most closed-end funds are sold to retail investors. To make the initial offering more appealing, almost all closed-end funds offer an income distribution.
Once the offering is completed, there is little to no marketing of a closed-end fund done by the deal sponsors. The deal is closed, the brokers have been paid, and the fund is listed on the exchange.
The shares’ value will be at the mercy of buyers and sellers just like any other stock.
If there are more sellers than buyers, the price of the shares will decline. Often with closed-end funds, they will trade below what the stocks and bonds owned by the fund are worth.
This is called trading at a discount to net asset value.
Buying income-producing funds when they trade at a discount to net asset value can be a winning strategy.
The tricky part can be deciding which type of fund to buy.
Why not just buy a bunch of them?
A Fund That Beats All Income ETFs
The RiverNorth Opportunities Fund Inc. (NYSE: RIV) is a closed-end fund that invests in discounted closed-end funds.
Based in Chicago, RiverNorth is an investment firm founded in 2000, so it understands market disruptions. The firm describes itself as one that specializes in opportunistic strategies in niche markets where the potential to exploit inefficiencies is greatest.
Closed-end funds are one of its most important sectors.
The RiverNorth Opportunities Fund owns regular closed-end funds across a wide range of asset classes. It also owns business development companies, which are a form of closed-end fund.
The fund is also allowed to own special purpose acquisition companies, and it has a decent position in those hot stocks right now.
With the click of a button, you can own almost every fixed-income sector as well as SPACS and some of the best performing equity funds on the planet. Most of these are trading at a considerable discount to the value of the stocks and bonds they own.
These funds produce a high stream of income that is paid into your account each and every month.
The fund’s current yield is over 13%, so it dwarfs just about every other income opportunity you will come across in today’s markets.
The RiverNorth Opportunities Fund can be an essential part of overcoming the Fed’s “lower for longer” policy.
— Money Morning Staff
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Source: Money Morning