High-Yield ETFs And CEFs: No Free Lunch
"Give me yield or give me death." In a world of perpetually low interest rates, investors have piled into yield-oriented equity sectors to quench their voracious appetite for income.
High-yield real estate ETFs and CEFs have been popular options, which typically offer juicy dividend yields of 5-10% compared to their broad-based real estate ETF counterparts yielding below 4%.
On Wall Street, there’s no free lunch. High-yield funds REITs been slammed by the coronavirus pandemic, bearing the brunt of the wave of dividend cuts that has bedeviled the sector.
While roughly a third of the equity REIT sector cut or reduced dividends in 2020, many of these high-yield ETFs and CEF saw 60-85% of their constituents cut dividends this year.
These ETFs typically include a collection of misfits, outcasts, small-caps, and recent underachievers. CEFs add another dimension by utilizing leverage. Understanding the source of excess yield is essential.