(This article was co-produced with HOYA Capital Real Estate.)
As a retired investor, and probably like many non-retired investors, I have different goals for each account. I am leaning towards generating sufficient income for the bill payment and the IRA that requires payment of his RMD. You should sell positions only when you want to sell, not when you need cash. RMD allows physical transfers, but uses QCD instead, and that option is not available for that withdrawal method. For these accounts, ETRACS Monthly 2x Leveraged US Small Cap High Dividend ETN (NYSEARCA: SMHB) was considered, but ultimately rejected as the total return outweighed the generous yield. To demonstrate this, compare what SMHB has done to one of the largest and most popular small-cap ETFs. Vanguard Small Cap ETF (NYSEARCA:VB). My suggestion is to stick to the basics!
Leveraged assets warning: Leveraged ETFs and ETNs have some major drawbacks, such as high fees, futures costs, and the fact that the X-Factor is applied almost daily to each ETF term, making them unsuitable for long-term investing. Long-term investors rarely (if ever) capture the X factor. This is clearly seen in the chart above. Two great resources on these assets are:
- Seeking Alpha Article: Leveraged ETFs: What They Are and How They Work
- FINRA Article: Learn More About Leveraged and Inverse Exchange Traded Products
ETN Warning: Exchange-Trade-Notes come with another risk leverage that ETFs don’t necessarily have. Issuer default risk. For those of you who have never heard of this instrument, I will briefly describe it.
ETRACS Monthly Pay 2x Leveraged US Small Cap High Dividend ETN Review
Seeking Alpha describes this ETN as follows:
SMHB aims to provide a 2x leveraged return linked to compounded monthly performance. Solactive US Small Cap High Dividend IndexThe index is designed to measure the performance of 100 dividend yield index constituents with a relatively small market capitalization, selected from the universe of eligible US listed equities. The securities are 2x leveraged with respect to the index. SMHB first traded on November 8, 2018.
Source: seekalpha.com SMHB
SMHB’s AUM is just $33 million and managers charge 85bps of fees. Payouts are volatile, with TTM yielding over 19%. UBS has several of his other ETNs and may choose to redeem all his outstanding ETNs at any time after November 15, 2019.
The Solactive US Small Cap High Dividend Index is publicly traded on a US stock exchange and aims to track price movements in stocks that meet certain minimum market capitalization requirements. Stocks with high forward-looking distribution yields from this universe.
Source: etracs.ubs.com SMHB Factsheet
A PDF of the methodology will be added to that description.
- The index is calculated and distributed by Solactive AG.
- Universe selection rules:
- Stocks must be traded and the company must reside in the United States.
- Rank the largest 3,000 companies according to the stock class market capitalization and liquidity rules that satisfy the above, and select the smallest 2,000 such companies.
- The entity has paid at least one regular cash dividend in the past 12 months, as determined by its annual dividend yield, and has not announced any discontinuation of its regular dividend.
- Ranking: Future Distribution Yield: The highest ranked 100 entities will be advanced to the next step according to the future distribution yield. To clarify: the higher the forward forecast distribution yield, the higher the rank.
- Weighting: Constituents are weighted based on the three-month average daily value (“ADV”) traded on all U.S. exchanges. The weight of each component is limited to 5% and excess weight will be distributed to other components on a pro rata basis as determined by ADV. If a constituent weight exceeds 5% weight after reallocation, the reallocation process is repeated until all constituent index weights are below 5% as of the selection date.
SMHB Holdings review
The only holding is the ETN itself. UBS explains:
The ETRACS Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN Series B is designed to provide 2x leveraged long exposure to the monthly compounded performance of the Solactive US Small Cap High Dividend Index, with no funding costs and no tracking fees. It may be less, and you may pay a variable monthly amount. Coupons linked to leveraged cash distributions related to underlying index constituents. Note that an investor will not receive a coupon if the index constituents do not distribute.
Listed bonds are senior, unsecured and subordinated bonds that provide investors with exposure to the total returns of various market indices, including those linked to equities, bonds, commodities and/or currencies, at an investor fee deducted. ETRACS offers innovative investment products with easy access to markets and strategies not readily available in existing markets.
Source: etracs.ubs.com SMHB snapshot
For more information, there is a prospectus available.
We didn’t know what the ETN held, but the index reports its composition, and these stocks make up the top 20 holdings.
With only 100 stocks in the index, SMHB is more concentrated than VB, with almost 1500 stocks.
SMHB Delivery Review
The first payment was made in December 2018 and has been monthly since then. It’s possible that the first big payout is the release of the earnings that have been built up over the first few years, but that’s pure speculation on my part.Seeking Alpha doesn’t provide a dividend scorecard for SMHB. One question I know readers will ask is about taxes. The SMHB prospectus takes five pages in legal terms to cover the topic.
Vanguard Small Cap ETF Review
Seeking Alpha describes the ETF as follows:
The Vanguard Small Cap ETF invests in small-cap growth and value stocks across multiple sectors. The fund CRSP U.S. Small Cap IndexVB was started in 2004.
Source: seekalpha.com VB
VB’s AUM is $44 billion and yields just 1.43%. Vanguard charges a fee of 5bps.
CRSP describes the index as follows:
The CRSP US Small Cap Index includes US companies between the bottom 2% and 15% of investable market capitalization. There is no lower limit on market capitalization, except as specified in the investability screen. Reconstitution occurs quarterly after the market close on the third Friday of March, June, September and December.
Key data points are:
- Largest company: $17,221m
- Smallest company: $18 million
- Company median: $2.168 billion
- Average company: $2,952 million
- Number of companies: 1,471
- Weight Max Enterprise: 0.40%
For more information on CRSP index building, we provide a methodology PDF.
VB Holdings Review
Sector allocation is as follows:
Like its large-cap cousins, two of VB’s top sectors are tech and finance, but the distribution is smoother than seen in these LC ETFs. Stocks held by Vanguard using industry designations are the top 20 stocks out of 1491 stocks, representing just 6.4% of the portfolio.
VB distribution review
Like most ETFs, VB pays out quarterly, unlike the UBS ETN, which currently pays out monthly. Seeking Alpha rates these results as ‘A-‘.
Shortly after launch, SMHB underperformed compared to the VB ETF. Twice as much pain actually appeared during his COVID market crash in early 2020.
Using the 2X strategy, one might expect StdDev to double that of a standard small cap ETF. Actually about 3 times! I have to say that I am amazed at how close the sharp and sortino ratios are.
For investors who like the concept of Exchange-Traded-Notes, the UBS-sponsored ETRACS series has over 70 choices, many of which are designed to enhance revenue generation. If so, you analyze its strength. UBS Group AG (UBS).
In my view, the small-cap space uses different investments for stock returns and income generation.Popular Small Cap High Dividend ETF WisdomTree US Small Cap Dividend (DES).Or a venture like CEF Royce Value Trust (RVT). Here is a comparison of SMHB and VB with these two funds.
Of course, VB ETFs have favored investors over SMHB ETNs, but are they the best small cap ETFs to own? VIOO: There’s definitely more to consider when comparing the two Vanguard Small-Cap ETFs. When I submitted this, another opinion on VB ETFs and small cap investing was published.