YYY: Long-Term Decay And Excessive Expense Ratio

seekingalpha09-07

D-Keine/iStock via Getty Images Since my first sell rating on Amplify High Income ETF (NYSEARCA:YYY) in February 2021, its share price is down -27% and its total return is +9% (before tax on ...

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Although YYY has performed decently in the last 10 months, this article renews my long-term negative opinion in the light of updated data. YYY strategy Amplify High Income ETF (YYY) is a high-yield fund that launched on 6/21/2013 tracking the ISE High Income Index. It has a portfolio of 60 closed-end funds (CEFs), a distribution rate of 11.85% and a 30-day SEC yield of 10.45%. The expense ratio is extremely high, even compared with other funds of funds: 0.50% in management fees plus 4.10% in held fund expenses, totaling 4.60%! You must see it to believe it:   YYY fees on 9/6/24 (Amplify ETFs website) As described by Amplify ETFs, the underlying index: selects CEFs ranked highest overall by ISE in the following factors: Yield, Discount to Net Asset Value (NAV), and Liquidity. This investment approach results in a portfolio which contains a variety of asset classes, investment strategies and asset managers. Eligible funds must be listed in the U.S., have a capitalization of at least $500 million and an average daily trading volume of at least $1 million. They are ranked based on a score including 3 factors: yield, discount to NAV and liquidity. Constituents are selected and weighted based on their score, with some adjustments. The index is reconstituted twice a year, in January and July. The fund changed names in 2019, keeping the same ticker and methodology. The methodology changed in July 2021: the number of holdings increased from 30 to 45, the constituent weight was capped at 3%, and the reconstitution became semi-annual (previously annual). It seems there was another modification in 2024, resulting in an inconsistency on Amplify ETFs website as of 9/6/2024: it reports a list of 60 holdings, while the index methodology document still claims that “the Index seeks to have 45 components, that number should be considered a maximum limit”. I don't like funds that change their methodologies: it may be a clue of failing strategy. Portfolio BlackRock is the heaviest fund sponsor in the portfolio (23% of asset value), followed by abrdn (15%) and Nuveen (14%). As of writing, YYY is diversified across asset classes: 59% of asset value is in bonds and 41% in stocks. These numbers may change over time. The heaviest subclass is senior loans, with 16% of assets. The top 10 holdings, listed in the next table, represent 32.2% of asset value, and the heaviest position weighs 3.92%. Therefore, the portfolio is well-diversified and risks related to individual funds are low to moderate.   TICKER NAME WEIGHT   IGR CBRE Global Real Estate Income Fund 3.92%   JQC Nuveen Credit Strategies Income Fund 3.28%   WDI Western Asset Diversified Income Fund 3.27%   MEGI NYLI CBRE Global Infrastructure Megatrends Term Fund 3.23%   JFR Nuveen Floating Rate Income Fund/Closed-end Fund 3.17%   FAX Aberdeen Asia-Pacific Income Fund Inc 3.14%   HQH abrdn Healthcare Investors 3.10%   BCAT BlackRock Capital Allocation Term Trust 3.06%   ECAT BlackRock ESG Capital Allocation Term Trust 3.03%   BMEZ BlackRock Health Sciences Term Trust 2.97%   Click to enlarge Closed-end funds are often chosen by investors for their high yields. They also have a few metrics that are not applicable to stocks and ETFs. Two of them are more important than the yield:  Discount to NAV (higher is better); Relative discount = Discount to NAV minus its 12-month average (higher is better).  The latter is meaningful because the discount often shows a mean-reversion pattern. The next table compares these metrics in the full CEF universe and a sample of 37 holdings of YYY (excluding those for which my data provider doesn’t have all the information).     Aggregate discount % Aggregate relative discount %   YYY Holdings (37) 5.30 -2.77   CEF universe 6.18 -2.39   Click to enlarge Calculation with Portfolio123 This sample of holdings is a bit inferior to the CEF universe regarding these valuation metrics, so YYY valuation is likely slightly below-par. Past performance Since 7/1/2013, YYY has underperformed its largest competitor, Invesco CEF Income Composite ETF (PCEF). The next table also includes a benchmark of mine: a simulated portfolio of the 100 CEFs with higher yields among those with an average daily trading volume above $100,000 and a positive discount. It is reconstituted twice a year in equal weight to make it comparable to the underlying index.   Since 7/1/2013 Total Return Annual Return Drawdown Sharpe ratio Volatility   YYY 58.58% 4.21% -42.52% 0.26 13.92%   PCEF 90.08% 5.91% -38.64% 0.42 12.51%   My Benchmark 123.91% 7.47% -42.88% 0.46 15.03%   Click to enlarge Data calculated with Portfolio123 YYY underperforms in total return, and also in risk-adjusted performance (Sharpe ratio). However, it is marginally ahead of PCEF over the last 12 months: YYY vs PCEF, 12-month total return (Seeking Alpha) The annualized return, including distributions, is below the distribution rate’s historical average (which is over 8%). It means YYY paid high yields while it was suffering a decay in value. The next chart confirms it: the share price has lost 46% since 7/1/2013. Adding to the pain, the cumulative inflation in the same time was over 30%, based on CPI data. PCEF was a bit better at preserving capital, although a 20% loss isn’t pretty either. YYY share price history (Seeking Alpha) The distribution history isn’t more attractive. The annual sum of distributions decreased from $2.06 per share in 2014 to $1.44 in 2023. For shareholders, it’s a 30% loss of income stream in 9 years, while the cumulative inflation was about 30%. YYY distribution history (Seeking Alpha) Takeaway  Amplify High Income ETF may be used in short-term trades to profit by some market anomalies. However, it has been a bad long-term investment since its inception in 2013, showing a significant decay in value and distribution. It is unlikely to suddenly become a winner. Anyway, its ridiculous expense ratio of 4.60% is sufficient reason to avoid it.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2465202629"}