(By Street Authority) Exchange-traded products (ETPs) are wildly popular. Their assets grew more than 30% a year during the past decade, compared to just 5% to 6% for mutual funds, according to McKinsey & Co. The management consultancy projects ETP assets will more than double over the next five years to $3.1-$4.7 trillion, from a little over $1.5 trillion today.
Most of the growth is in exchange-traded funds (ETFs), a subclass of the exchange-traded product family. But a handful of exchange-traded notes (ETNs) are also a small part of this market.
And while there are ETFs for everything from copper to cocoa, ETNs offer a unique type of exposure to mainly two high-yield groups: master limited partnerships (MLPs) and business development companies (BDCs).
Readers of my High-Yield Investing newsletter know that I'm a big fan of MLPs and BDCs. These unique businesses allow investors to capture higher yields than many blue chip stocks and bonds.
MLPs are in the pipeline business, transporting oil and natural gas from the drilling site to the "downstream" facilities such as refineries and storage facilities. They earn a fee based on the volume transported, and in turn are not as sensitive to energy prices as drilling companies, for example. This provides a reliable stream of income, much of which is passed right on to investors in the form of sizeable dividends.
BDCs, on the other hand, provide financing to smaller companies seeking to grow their business. In return, many BDCs not only get interest payments on the money they loan (which is why BDCs pay hefty dividends), but also secure an equity stake in the business as well.
So if, like me, you're a fan of these dividend juggernauts, then ETNs are definitely worth a look. In some cases, I've found these overlooked securities yielding as high as 16%.
ETNs are an entirely different beast from ETFs. Both track the performance of an index and offer a simple way to move in and out of a sector.