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With the roller coaster ride stocks have taken in the last 5 years, I've been exploring monthly income options as a more conservative, stable way of having a distribution come in every month. I've read the previous post on this topic and a great article on milliondollarjourney that surveys these funds...Sitting mostly in cash/bonds index funds right now, I'm now looking to slowly re-enter the market and obtain higher yield, but am questioning how useful ETFs would be for a few reasons:

- hidden MERs: since the HST, it seems like no ETF wants to clarify it's MER, rather "management fees" and tons of legal mumbo-jumbo accompany each description. The banks indeed charge a slightly higher MER, but it's on the order of less than 0.5% in most cases. It seems that the consistency and stability of their distributions far outweigh the headaches I'd have trying to mimic these funds myself.
- returns: when comparing ETF index funds vs. monthly income funds from the major banks, how can one seriously match these monthly returns? They utilize strategies that combine income trusts, corporate bonds, and financials in a way that consistently yield 7-10% annualized with little fluctuation. Examples include BMO Monthly Income, CIBC Monthly Income etc. I'm not aware of any approach using ETFs that gets one into that ballpark...
- Perhaps ETFs win when viewed from a long term investment/capital gain standpoint, but in a head to head comparison for monthly income maybe it's a different, and complicated debate for those of us who won't be looking ahead 20-30 years?

I've been able to manage a decent return with precious metals being the bulk of my equity investment (about 15% of my portfolio this year), but I am looking to turn toward a more stable and consistent form of investment that minimizes mechanical market timing.

In summary, before I give up on ETFs and start investing in these monthly funds, can anyone demonstrate for my own knowledge, how with a couch potato fund, I can target 7% annual distribution and have it come in at least quarterly (if not monthly)? btw, I'm a health professional with a horizon about 15 yrs from retirement, I'd prefer not to scramble and worry about wide market fluctuations from here.

Thanks for your help! :)
 

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Of the 'monthly income funds' I know of, ROC are a significant contributor to the distributions, so depending on how your investments get taxed, these types of funds may not be advantageous at all.

Also, many of these funds relied heavily on income trusts for their high distributions. I can't see how they will sustain such high yields going forward.
 

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I agree. If a banks fund is going to average 7% return, it can't be with corporate bonds (<5%) nor government bonds (<3%). Even the BBB convertible debentures are only in the 6+% range.

So what are they using to achieve their high yields and why not just buy that if you are chasing returns?
 

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Discussion Starter #4
So what are they using to achieve their high yields and why not just buy that if you are chasing returns?
I feel that one can't realistically hold the individual components efficiently enough to match the 7-10% annual distribution without suffering wide annual fluctuations in principal on the open market. In response to Sampson's point, it doesn't appear that income trusts are all that huge a part of some holdings, here is an example:

CIBC's Monthly Income Fund for example, top 10 holdings (currently yielding 7%, distribution every month):
1. Cash & Cash Equivalents
2. Royal Bank of Canada
3. Toronto-Dominion Bank (The)
4. Canada Housing Trust No. 1, Series 'MAR', 2.95%, 2015/03/15
5. Canada Housing Trust No. 1, Series '1', 2.20%, 2014/03/15
6. Barrick Gold Corp.
7. BCE Inc.
8. Crescent Point Energy Corp.
9. Government of Canada, 5.75%, 2033/06/01
10. TransCanada Corp.

A review of their financial statement for overall allocation:
Government of Canada & Guaranteed 42.00
Corporate 1.93
Consumer Discretionary 2.88
Consumer Staples 0.43
Energy 10.05
Financials 12.89
Industrials 2.69
Materials 1.68
Telecommunications Services 5.38
Utilities 2.32
Short-Term Investments 17.59
Other Assets, less Liabilities 0.17
Total 100.00

Within the class of monthly income funds, 10 year average performance figures are over 7%. They've been doing this awhile and doing it well enough...

Regarding the bonds: I'm starting to think that bond index funds (like XBB) are too diversified and it dilutes the yield. The example above shows that maintaining a 5.75% government bond as a large component can work. I wouldn't want to hold the individual strip individually though, given it's lack of liquidity.

Perhaps their combo of fixed income instruments (not always exchange traded), and carefully chosen stocks are contributing to the successful monthly yield. I'd hold in a TFSA/RRSP initially, so I'm not as worried about tax implications.

I anxiously await any examples of how this model can be replicated using low cost ETFs?
 

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http://www.google.ca/finance?q=MUTF_CA:CIB512 says that its value dropped 30% in late 2008. If you can tolerate that much volatility, you can mix, say XHY.to and CPD.to and get a yield that matches that easily. Not to mention that about 40% of of that fund's return is in the form of ROC. Or you could look at CBD.to, Claymore's wrap of various etfs that pay decent distributions. Currently yields 4%, but had much better capital gains, due to not paying out excess ROC.
 

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a glance at the top 10 holdings of the cibc monthly income fund shows that this fund is not generating 7% on these & similar securities alone.

no, it has to be involved in derivatives/options/futures trading as well. This is how one squeezes more out of the good old stuff. This is what i do. The actual return from an optioned blue chip portfolio is close to 10% per annum, so in offering retail investors 7% cibc is keeping a healthy margin for itself.

one doesn't even have to read the prospectus. A glance at the risk profile for the cibc monthly income fund tells it all:

" Capital depreciation risk, concentration risk, derivative risk, equity risk, fixed income risk, general market risk, large investor risk, legal and regulatory risk, securities lending, purchase and reverse repurchase agreements risk, short selling risk, trusts and partnerships risk."

i find myself wondering why anyone would give away that 2.5-3% per annum. It's not that hard to learn to do oneself.
 

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Discussion Starter #8
Thanks for the replies so far.

ledtim, CBD.to is a great option that I was unaware of until you pointed it out, thanks for mentioning.
 

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a glance at the top 10 holdings of the cibc monthly income fund shows that this fund is not generating 7% on these & similar securities alone.

no, it has to be involved in derivatives/options/futures trading as well. This is how one squeezes more out of the good old stuff. This is what i do. The actual return from an optioned blue chip portfolio is close to 10% per annum, so in offering retail investors 7% cibc is keeping a healthy margin for itself.

one doesn't even have to read the prospectus. A glance at the risk profile for the cibc monthly income fund tells it all:

" Capital depreciation risk, concentration risk, derivative risk, equity risk, fixed income risk, general market risk, large investor risk, legal and regulatory risk, securities lending, purchase and reverse repurchase agreements risk, short selling risk, trusts and partnerships risk."

i find myself wondering why anyone would give away that 2.5-3% per annum. It's not that hard to learn to do oneself.
I think you're accusing CIBC of fraud or negligence. They can't skim off 2.5 - 3% without disclosure. If you're suggesting they are selling underpriced options to their own book out of the fund, that's probably illegal.
 

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no one is being accused of anything. It's all right there in the disclosure documentation. A total management fee of 2.5-3% including the stated MER plus the cost of commissions generated by the trading of securities in the portfolio - these are traceable in the notes to all mutual fund financial statements - is routine standard fare for all canadian bank-managed equity mutual funds.

c'mon andrew you're smart, not stupid. Look at the top 10 holdings. These are not generating anything like 7%. Plus the fund will want its typical 2.5-3% omnibus of management fees. So the money has to come from somewhere. And they name it. Fully. Fairly. Legally. Ethically. It's coming from derivatives trading, repo & reverse repo trading, short selling and certain trust & partnership interests. End of story.

btw andrew. Today i closed out my teck US option strategy. Less than 3 months old. Return of 34% in capital gains, or 137% annualized. In US dollars. More in CAD. Yea it's a hedge fund strategy.

like i said, most people could learn to do this.
 
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