New ETF Aims To Provide A Steady 7% Annual Distribution Rate

[COZICAN]

New ETF Aims To Provide A Steady 7% Annual Distribution Rate

https://www.investors.com/etfs-and-...aTGynB02RFc_mjPOn3doommjentvSCL2cUFqopLgWpPj0


Too good to be true?

 

[ziggy29]

Too good to be true?

I think so. A few years ago, Vanguard tried to create a series of these "managed payout funds" with fairly aggressive withdrawal rates on the high end. These funds had difficulty meeting their objectives in a number of market environments and Vanguard eventually replaced them with a single managed payout fund which targets 4%. The biggest problem with meeting the higher target in recent years has been low bond yields.

 

[audreyh1]

New ETF Aims To Provide A Steady 7% Annual Distribution Rate

https://www.investors.com/etfs-and-...aTGynB02RFc_mjPOn3doommjentvSCL2cUFqopLgWpPj0


Too good to be true?

I’m sure a chunk of that is return of principal. You just have to decide how much depletion you are comfortable with.

 

[ziggy29]

More from the article:

The distribution is not a dividend. It's a consistent payout that investors can rely on. All or part of the distribution may consist of a return of capital. That means if dividends, fixed income and capital gains don't fund the distribution, it may be funded by the capital investors pay in.

So yes, they may be able to guarantee a 7% payout, but many times -- especially if the market doesn't cooperate for a long time -- much of it will be return of principal. And over time, if enough of your principal is returned, there isn't enough of it left to generate 7% off the original investment amount even in good markets, so principal is still returned in *that* case.

In other words, be prepared to outlive your distributions. Is there a chance you won't deplete it, even over decades? Sure. Do I like the chances? No.

 

[ziggy29]

Oh, and there's more:

This ETF says it's the first designed to pay its investors a consistent monthly distribution. That distribution should equal 7% of the fund's net asset value by the end of the year.

That's not 7% of the original investment. That's 7% of the fund's NAV. In a bad market the NAV will be dropping, so from year to year, so will your income. Return of principal could result in lower NAV, too. If you invested $100K, you should get $7,000 returned the first year (simplifying some), but if the NAV drops by 12% (including returns of principal), your next year's payout looks like it would be 12% lower. And so on.

 

[COZICAN]

More from the article:



So yes, they may be able to guarantee a 7% payout, but many times -- especially if the market doesn't cooperate for a long time -- much of it will be return of principal. And over time, if enough of your principal is returned, there isn't enough of it left to generate 7% off the original investment amount even in good markets, so principal is still returned in *that* case.

In other words, be prepared to outlive your distributions. Is there a chance you won't deplete it, even over decades? Sure. Do I like the chances? No.

Thank you for that explanation. I read through it but didn't totally understand. I do appreciate your input.

 

[OldShooter]

You can take 7% out of any portfolio if you are willing to take principal. No need to look at this particular fee-heavy and leveraged contraption. I think P.T. Barnum would approve of this one.

 

[ziggy29]

You can take 7% out of any portfolio if you are willing to take principal. No need to look at this particular fee-heavy and leveraged contraption. I think P.T. Barnum would approve of this one.

And by taking out 7% of the new balance each year, rather than 7% of the original investment, you will never run out of money!