This is a trying time for investors as we’ve all watched the market fall over the last several weeks. Attorney Jake Zamansky encourages all investors to take a look under the hood of your investment portfolios to find out whether there are certain assets that are more of a risk than originally thought. Our Seeking Alpha article, “It’s Time to Look Under the Hood of Your Investments” is reprinted here for your convenience.
- Many Mutual Funds and Indices Contain Risky Junk Bonds
- These Investments Have Recently Suffered Outsized Losses
- Investors Need To Know What’s in Their Funds
While we have all watched our investments plummet in the past few weeks, some investors have been hit harder than others.
For investors who own high-yield mutual funds and indices, it behooves them to check and see if the underlying assets in the funds are riskier than they originally thought.
Take, for example, the VanEck Vectors High-Yield Municipal Index ETF, ticker symbol HYD. With $3.6 billion in assets, it’s the largest high-yield, municipal-bond ETF of its kind.
According to a recent Bloomberg article, the ETF “was the picture of tranquility for much of the past three years. From the start of 2017 through February, its share price traded in a range of less than $7.00, starting at $59.26 and climbing to as high as $66.14 on Feb. 26.”
Then something snapped suddenly, according to Bloomberg. It fell 1% on March 6. Then 5% on March 9. Then 3.4% and 2.3% on March 10 and 11 before plunging a whopping 15.6% on March 12 during the worst stock rout since Black Monday in 1987. Within the span of about two weeks, it had dropped from an all-time high to an all-time low.
It was such a violent sell-off that it triggered the U.S. Securities and Exchange Commission’s so-called alternative uptick rule, which restricts short selling from further driving down the price of a stock that has dropped more than 10% from the previous day’s close. The moves started days before the rest of the market cracked.
Turns out, the HYD ETF owned unrated bonds of two assisted living facilities that are feeling the impact of the Coronavirus. How would you, the investor, know that if you didn’t look at such funds with a magnifying glass?
“Unrated debt issued for Tapestry Senior Living traded as low as 38.5 cents on the dollar on March 6, down from 100 cents as recently as Dec. 5, according to Bloomberg. “The homepage for each of its locations includes a banner titled “COVID-19 UPDATE” that details its no-visitation policy because of the outbreak. “Thank you for assisting us in keeping everyone safe and healthy and thank you in advance for your understanding of our need to operate with an abundance of caution,” the website reads.
“Similarly, unrated securities issued for Tuscan Gardens of Palm Coast plunged on March 6 to 57.5 cents on the dollar from 98 cents on Jan. 7,” according to Bloomberg. “These are fire-sale prices. Based on publicly available holdings data compiled by Bloomberg, HYD owns each of these bonds.”
High-yield municipal bond fund investors are now experiencing the shock that Oppenheimer Maryland and Virginia municipal bond fund investors had several years ago when they discovered that those funds held 50% of assets in beaten up Puerto Rico bonds.
Just as money managers who ran municipal bond funds that added Puerto Rico to their portfolios and mortgage-backed securities added subprime loans to juice returns, many other funds have sprinkled their portfolios with less than desirable debt.
UBS ETRACs, which are “Exchange Traded Notes” (ETNs) had been bought recently by Mom and Pop investors for $20 per share ( like stocks) on the NYSE. On March 16, when the market suffered a huge decline, UBS exercised its “accelerated redemption” feature and liquidated billions of dollars of ETRACs at prices of $2 to $5 per share, leaving investors holding the bag.
In this bear market, it’s time for investors to look under the hood of their investments.
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