Archive for March, 2012

Yorkville High Income MLP YMLP

Nice launch on this first product from Yorkville. Bloomberg volume was 93,333 shares while Yahoo showed 98,633. Range was suspect as explained in the previous post.

With an expense ratio of .82 and an expected yield in excess of 8% this product should attract investors looking for yield when there is little available in the fixed income market. I count 10 MLP based products with AMJ having the largest AUM at just over $4 billion. AMLP is second with $1.8 billion and MLPI, MLPN and MLPL all with $100 million or more. In terms of daily volume, the new entry YMLP came in 4th of the 10-outstanding for an early day. If the volume can be sustained or grow, this looks like a possibility for a real winner. Will be watching this as to share volume and AUM growth-the yield is attractive.

ETF Warning

First the warning. Watching a new product I noticed that the range for the day was $19.85 the low to $30.12 the high. The product (discussed below) is an ETF of Master Limited Partnerships-basically a yield play.

The only way the high/low range could be this wide is if an unsuspecting investor entered a market order at or before the open of the market. Market makers (on a new issue the source of shares to buy) typically enter wide to very wide quotes to satisfy exchange requirements. Once the market opens and the underlying components of the ETF open, the Market Maker will tighten up the bid and the offer to more accurately bracket/reflect the NAV of the ETF. Frequently the market order that has been entered before the spread has been tightened will be executed at a disadvantageous price. If the price is really poor, there is a mechanism available to either break the trade (cancel) or adjust the price. The unfortunate part of this effort to change a trade is that there is a fairly small time window during which the investor must inform the firm holding his account.

Key defense-DO NOT ENTER MARKET ORDERS PRIOR TO THE MARKET OPEN ON NEW OR ILLIQUID 

ETFS. I personally never use market orders.

Mutual Funds versus Exchange Traded Funds

I was recently asked by a neighbor to comment on the suitability of a portfolio recommended by a financial advisor. The neighbors are in their early 60’s and relatively unsophisticated when it comes to investments. I never asked the size of their savings.

The couple are most concerned with preservation of capital with some income.

The recommendations consisted of 12 funds. Eleven were mutual funds with a concentration in the fixed income area. One was an ETF (VWO from Vanguard). As I researched the funds, I was surprised to find that three of them carried considerable front end loads-as high as 4.75%. The rationale given was that they were buying active management. An in depth look into the 11 mutual funds showed that they carried fees of between 80 and 190 BP annually. 100 BP on a $100,000 investment equates to $1,000 per year. I looked to find similar ETFs with close to the same risk exposure. In every case there was a comparable ETF (though not actively managed) that carried fees in the range of 15 to 60 BP annually. In addition to the fund fees, the RIA is charging 125 Basis Points to manage the account and more if he had discretion to make trades.

I recommended that the couple ask the Rep to try and find ETFs that fit the same criterion as the Mutual funds chosen. 

There are few active managed ETFs currently in the marketplace. PIMCO and Wisdom Tree having several. Charles Schwab recently announced a suite of actively managed ETFs and several more fund managers have plans. 

Key questions to ask your investment advisor:

Have actively managed funds out performed index funds over the short and long term?

Is there an ETF that matches the mutual fund being recommended, that has a dramatically lower fee structure?

What are you getting for a front end load?