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In a market starved for yield, one ETF offers close to 9%. Here’s how it works

Yield is a bit like a hot commodity these days.

With the Federal Reserve keeping its benchmark interest rates near zero until at least 2022, investors are flocking to popular bond exchange-traded funds for income.

Here are the yields for some of the market’s most-loved bond ETFs:

Higher-yielding funds tend to come with more risk, meaning they could be subject to more volatility than their lower-yielding counterparts.

But that can be part of a strategy, Amplify ETFs founder and CEO Christian Magoon told CNBC’s “ETF Edge” on Monday.

Enter the Amplify High Income ETF (YYY), a portfolio of 30 closed-end funds that boasts a yield of nearly 9%. Closed-end funds list on exchanges just like stocks and raise capital through initial public offerings but unlike ETFs do not create new shares or buy back existing ones.

“The odd thing about closed-end funds is that they often trade below their net asset value, meaning you could buy them at a discount to what the actual securities are valued,” Magoon said. “YYY’s index seeks to own 30 that have kind of the highest blend of discount to NAV as well as distribution rate.”

YYY’s portfolio is a mix of stock and bond funds managed by some of the biggest names in ETFs including BlackRock and Legg Mason. Currently, the group is trading at a 13% discount to its net asset value, which produces “high current income,” Magoon said.

“The current SEC yield on YYY is 8.85%. How can we do that? Essentially, we’re buying a dollar’s worth of assets for 87 cents,” the CEO said. “This is a more volatile income investment from an NAV standpoint. The trade-off is you should get quite a bit more high current income over time.”

He added that YYY is often used in income-focused barbell strategies to balance more “low-volatility, conservative income investments.”

John Davi, founder and chief investment officer of Astoria Portfolio Advisors, wasn’t so open to the idea of buying a basket of closed-end funds.

“If you’re going to take on the risk of owning a financial asset, you should be compensated for taking that risk,” he said in the same “ETF Edge” interview. “I just don’t think that happens in closed-end funds.”

First, it’s critical to know that closed-end funds may never stop trading at discounts to their NAVs, he said. Second, he stressed the importance of looking at an investment’s total return versus just its yield.

For instance, while YYY has roughly the same level of volatility as the SPDR S&P 500 ETF (SPY), SPY produced a total return of 50% over the last three years while YYY returned only about 2%, Davi said.

“I think there’s other ways to generate yield if people are just going to be purely focused on yield,” he said. “LQD, I think, is attractive from a yield perspective. I think PFF is attractive from a yield perspective. Even HYD, the high-yield muni ETF, I think is pretty attractive. All those have much lower standard deviations [and] higher total returns, so, on a yield-per-unit-of-risk basis, I think that you’re better off in those areas compared to closed-end funds.”

YYY closed less than half of 1% higher on Thursday.

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