Dear Mr. Berko: My wife and I are both seniors and have a $20,000 certificate of deposit coming due at Wells Fargo. We told the teller that we won’t renew the CD because the rates are too low. The teller introduced us to a Wells Fargo stockbroker, who wanted to sell us an annuity. We know that the annuity is not suitable, so we declined and visited another broker. He recommended we buy 1,000 shares of YieldShares High Income ETF at $18.58 because it pays 10.6 percent. That is an impressive yield and more than twice as much as AT&T’s, which my wife looked at and thinks we should buy. We both have good pensions and Social Security and no debts. We know nothing about the stock market and need your advice. Please help us make a decision. How should we invest this money? We have nearly $170,000 invested in good electric utilities that we’ve bought over the past 18 years.
— S.M., Wilmington, N.C.
Dear S.M.: I’m not surprised that the Wells Fargo guy recommended an annuity; those guys do that a lot. And they’re supposed to. I’m surprised the second broker didn’t try to sell you a mutual fund with a 6 percent commission. They do that a lot, too. I’m also surprised he recommended the YieldShares High Income ETF (YYY-$18.60), which, in my opinion, is even more unsuitable than the annuity your Wells Fargo guy was pushing.
I believe you’d have less than a 50-50 chance of receiving continued high income with YYY, which is an exchange-traded fund. YYY invests 80 percent of its $80 million in assets in funds in the ISE High Income Index. Because the ISE High Income Index owns securities issued by other investment companies, YYY is called a “fund of funds.” Management invests its assets in those funds in hopes of emulating the performance of the top exchange-listed closed-end funds. It’s pure junque!
Because YYY is a fund of funds, its investment performance depends on the investment performance of the underlying funds in which it invests. That’s not good. YYY’s annual operating costs are 1.82 percent. Therefore, a $20,000 investment in the first 12 months of ownership would cost you $364 in fees. And if YYY were to have an annual 5 percent appreciation and operating expenses were to remain the same, the fees to own YYY for 10 years would be $4,274. Think about it; that’d be turnpike thievery and 22 percent of your investment costs.