# iShares XTR



## tygrus (Mar 13, 2012)

I have owned this stock off and on mostly because of the holding mix and a nice dividend, then doing a little more reading on the website I see the etf is also backed by derivatives though there are no details how much of the asset mix is in that area. 

I have gone through the description of a lots of other etfs and this is the only one that mentions derivatives. Is this something to be worried about?


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## GoldStone (Mar 6, 2011)

XTR distribution yield is higher than the yield of the underlying investments. They rely on the healthy capital gains from equities to support the distribution. If stock markets turn south, they will have two options:

1. Cut the distribution >>> unit price would take an immediate hit
2. Start paying you with your own money >>> unit price would deflate slowly as they pay out ROC

XTR is a bad product. With or without derivatives risk.


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## Eclectic12 (Oct 20, 2010)

tygrus said:


> I have owned this stock off and on mostly because of the holding mix and a nice dividend, ...


You might be aware of it but for those new people who might be reading this - XTR pays a cash distribution, not a dividend.
The distribution is a mix of different income types, where each will be taxed at a different rate.

Looking at the 2013 tax breakdown to illustrate ... where $0.72 was paid, only $0.11088 is an eligible dividend (taxed at a good rate), $0.17448 was "Other Income" which is taxed at a high rate, $0.14208 was a capital gain (depending on income level, this is 2nd best tax rate or best) and 0.19236 was "Return of Capital" (this could be tax deferred until the unit is sold or payable this tax year as a capital gain).


Cheers


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## andrewf (Mar 1, 2010)

GoldStone said:


> XTR distribution yield is higher than the yield of the underlying investments. They rely on the healthy capital gains from equities to support the distribution. If stock markets turn south, they will have two options:
> 
> 1. Cut the distribution >>> unit price would take an immediate hit
> 2. Start paying you with your own money >>> unit price would deflate slowly as they pay out ROC
> ...


Why would the unit price take a hit if they cut the distribution? It is supported by the NAV of the underlying assets.


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## james4beach (Nov 15, 2012)

XTR is like many other monthly income funds, and many in this group (including mutual funds) are somewhat misleading to investors on the issue of yield and earnings. The reason I dislike XTR more than the rest is its asset allocation (see below).

iShares publishes a yield of 6.1% without explaining that *this is not the yield of the underlying portfolio of investments*. All it means is that they pay out 6.1% of the fund every year as a distribution. The assets that the fund holds may only be earning something like 4.0% (random guess -- I don't know). iShares should be publishing that number, for transparency.

As a result, investors come along and think XTR earns through interest & dividends a whopping 6.1% which is absolutely not true. It also won't compound your money at 6.1%... nor will it earn 6.1%. Similar criticsms can be made of other Monthly Income Funds.

The other problem with XTR is its holdings. "Diversified Monthly Income Fund" sounds like something rather safe and conservative, but it's not. A conservative monthly income would be close to a balanced fund, with around 50/50 stocks and bonds. XTR holds:

45% equities
37% junk bonds <--- notice this difference vs RBC
18% normal grade corporate bonds

Junk bonds -- which have been crashing since August, by the way -- have risk characteristics that are much more like stocks. I see this portfolio as effectively being 82% equities, in risk terms.

To see just how risky this is, compare to the RBC Monthly Income Fund. They have:

48% equities
33% federal/provincial bonds <--- notice this difference vs XTR
19% corp bonds

That's what I'd expect to see in a Monthly Income Fund. It's basically a balanced fund (50/50 equities and bonds) with rather conservative bonds... in this case a huge amount in government and provincial, and minimal corporate.

Or look at it this way. *Recipe to create XTR*: start with a standard Monthly Income Fund, like RBC's. Take away the only safe bonds it holds (1/3 of the fund). Replace them with the riskiest bonds on earth. Ta-da! Ready for seniors to buy.


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> Why would the unit price take a hit if they cut the distribution?
> It is supported by the NAV of the underlying assets.


Eventually ... in the meantime, if the buyer is unaware of how the distributions are being funded - I suspect they've bought based on the distribution, which likely means a cut distribution is going to generate selling.


Cheers


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## GoldStone (Mar 6, 2011)

andrewf said:


> Why would the unit price take a hit if they cut the distribution? It is supported by the NAV of the underlying assets.


You are right. "Take a hit" is too strong a wording. It may trade at a discount to NAV if yield chasers rush for the exit all at the same time. The discount to NAV can reach or exceed 1%, but it wouldn't stay there for long.


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## james4beach (Nov 15, 2012)

james4beach said:


> Or look at it this way. *Recipe to create XTR*: start with a standard Monthly Income Fund, like RBC's. Take away the only safe bonds it holds (1/3 of the fund). Replace them with the riskiest bonds on earth. Ta-da! Ready for seniors to buy.


And let's fast forward. The junk bonds within XTR continue to plummet. The 1 year total return is now -4.79%. This is really quite horrendous when you consider that a benchmark 'balanced fund' consisting of just XIU & XBB has a 1 year total return of (-6.67% + 4.51%)/2 = -1.08%

XTR is literally doing 4x worse than a balanced fund. And it's because they played the yield-chasing game.

I will reiterate that XTR is inappropriate for anyone wanting a safe or conservative investment. It purports to be a safe and steady "monthly income fund" when in reality, it has very high junk bond exposure.

Let's check the 5 year returns while we're at it. XTR is +5.14% annualized, seems pretty good... but ... again the benchmark balanced fund of XIU & XBB has 5 year return of (6.11% + 4.31%)/2 = *5.21%*

So there you have it ... for all its exotic junk bonds, exotic preferred shares, high dividend stocks and funds-of-funds magic, _XTR performs worse_ than a benchmark balanced fund both in the short term and long term.


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## My Own Advisor (Sep 24, 2012)

james4beach said:


> So there you have it ... for all its exotic junk bonds, exotic preferred shares, high dividend stocks and funds-of-funds magic, _XTR performs worse_ than a benchmark balanced fund both in the short term and long term.


I think anything with the word "derivatives" in the synopsis or prospectus of any financial product should be avoided, always, forever, run away...! 

"Exposure to these types of income-bearing investments may also be obtained by investing directly in them and/or through the use of derivatives."


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## Sampson (Apr 3, 2009)

Don't be so harsh on the poor fund.
Remember XTR was original holding income trusts and how could Barclay's have known the government was going to change the tax laws in Canada? I mean income trusts were always and continue to be a great way to 'scam' the government and reduce taxes paid by allowing corporations to payout and the holders to use their own tax credits.

It was an extremely popular product and if people haven't read the prospectus and understood all the changes that happened....caveat emptor


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## My Own Advisor (Sep 24, 2012)

Fair Sampson. But you wouldn't own it right?!


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## Sampson (Apr 3, 2009)

My Own Advisor said:


> Fair Sampson. But you wouldn't own it right?!


I sold what I held when things changed....I read the prospectus...


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## My Own Advisor (Sep 24, 2012)

LOL. You make me laugh.


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## agent99 (Sep 11, 2013)

There is another ETF, FIE that has a similar performance. Maybe 5.8% total return over past 5 years. For equity holds all the banks plus Sunlife and Power Corp. To balance, holds about 21% CPD (pfds) and 10% XCB (bonds). Distribution yield is 7.46%. Sounds good doesn't it! But in 2014, 52% of that was ROC. In other words they give you back some of your money. This may not be such a bad thing for those who want a stream of cash to live off. But don't believe you are getting a 7.46% yield. More like just 1/2 of that. XTR and FIE are just two funds that post, what I think is, misleading performance data.

The other interesting thing, is to compare the 5 year performance of FIE (and perhaps XTR too) against some of the funds holdings. The banks, for example, had a 5 year total return that was double that of FIE.


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## james4beach (Nov 15, 2012)

The performance pages at the ETF sites are good to look at, because the total return is agnostic to the type of distributions it gave out. It's showing the total return. The cash distributions of XTR are inflated with all the return of capital, but the total return cuts through all the bullsh** and shows the net result.

If in fact you can get a higher return by just being in a TSX index and bond fund together (like XIU & XBB that I mentioned earlier), then obviously this is superior.

I would start with the question, which is the better investment? I suspect the answer is the plain old TSX index. The correct way to achieve the same 'cashflow' through say XIU is to just sell off a certain number of shares periodically, raising the cash you need.

The article above says



> ...these things usually pursue some lower quality investments (e.g. junk bonds, risky stocks) AND charge higher fees. Typical examples of this, which they will try to talk you into, are “*Monthly Income Funds*” and “Dividend Funds”. The problem is that these have much higher fees than plain index funds and sometimes contain worse fundamental investments. Often, *they also have worse total returns than plain index funds!*


Which is exactly what XTR illustrates


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## agent99 (Sep 11, 2013)

james4beach said:


> T
> The correct way to achieve the same 'cashflow' through say XIU is to just sell off a certain number of shares[/URL] periodically, raising the cash you need.


That is of course possible. But then you are at the whim of the market and you have to pay trading fees each time you sell. Many of those funds pay monthly or quarterly distributions. They also pay a more or less fixed amount each time. This may suit retirees? They are obviously popular amongst a segment of the population, even we don't think they make a lot of sense. 

By the way, XIU only had a 5.22% Total Return over past 5yrs. XIC 5.33%. So FIE actually beat those and XTR almost tied!


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## james4beach (Nov 15, 2012)

agent99 said:


> But then you are at the whim of the market and you have to pay trading fees each time you sell.


These are misconceptions and part of the _image_ (rather then the reality) of monthly income funds. XTR is at the whim of the market too. All of these funds require price appreciation, but it's hidden from you. When XTR pays out a distribution at a time the market is depressed, it _hurts_ the fund because this depletes its capital. There really is no difference... it's all smoke & mirrors.

An analysis of XTR you can find through google shows that if the underlying prices don't appreciate, in 10 years the XTR price drops by 25%. In 20 years the XTR price drops by 60%. This fund requires constant capital appreciation.

The trading fees are also a non issue. Let's look at actual fees. Say it's a $20,000 investment.

a) With XIU, you pay annual fees of 0.18% x $20,000 = $36 plus let's say four sales a year costing 4 x $10 = $40. Total fees $76
b) With XTR, you pay annual fees of 0.56% x $20,000 = $112 ... significantly higher fees even though you are not placing trades

This is the amazing thing about these monthly income funds and dividend funds. Somehow they convince people that it's worse to sell shares to raise cash. I'll admit that it's more paper keeping headache (ACB etc) but other than that, both methods are functionally equivalent.

Dividends _are_ automatic, though, and that's quite nice. I'll admit to that.


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## agent99 (Sep 11, 2013)

james4beach said:


> An analysis of XTR you can find through google shows that if the underlying prices don't appreciate, in 10 years the XTR price drops by 25%. In 20 years the XTR price drops by 60%. This fund requires constant capital appreciation.


It would be interesting know the equivalent numbers if you bought XIU instead of XTR and then sold off enough each quarter to bring your cash flow to be same as XTR distribution. Again with no growth of underlying securities.


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## My Own Advisor (Sep 24, 2012)

Well, the big picture view 5-year total returns ending August 2015:

XTR = ~ 5.1%
XIU = ~ 6.1%

I'll take XIU thanks but you'd have to factor in your selling costs.


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## agent99 (Sep 11, 2013)

My Own Advisor said:


> Well, the big picture view 5-year total returns ending August 2015:
> 
> XTR = ~ 5.1%
> XIU = ~ 6.1%
> ...


But those still include growth of underlying securities. This was what I was looking for a comparison of (assuming XIU sold to maintain same cash flow as XTR):



> An analysis of XTR you can find through google shows that if the underlying prices don't appreciate, in 10 years the XTR price drops by 25%. In 20 years the XTR price drops by 60%. This fund requires constant capital appreciation.


But no big deal. I don't hold ETFs anyway! (actually have a small amount of XGD. I think that is only one.)


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## andrewf (Mar 1, 2010)

So assuming the asset doesn't behave how it behaves in reality, how would it behave?


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## james4beach (Nov 15, 2012)

james4beach said:


> *Recipe to create XTR*: start with a standard Monthly Income Fund, like RBC's. Take away the only safe bonds it holds (1/3 of the fund). Replace them with the riskiest bonds on earth. Ta-da! Ready for seniors to buy.


I'm pleased that we here in this forum raised the alarm about XTR before it started going south. I hope we were able to help out investors.

As of today (Dec 14, 2015) the 3 year total return of XTR is now negative. You would have been better off in a cash savings account.


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## My Own Advisor (Sep 24, 2012)

Not all ETFs are created equal.


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## james4beach (Nov 15, 2012)

News: XTR cut its distribution from $0.06 down to $0.05, which is a -17% decrease in the income it pays out.

Since XTR became a "monthly income fund" in 2010, it always distributed 6 cents. Not any more. The January distribution was 5 cents.

I checked the underlying assets again. The stocks and bonds within XTR have an income yield of 5.12% but the fund pays out a distribution yield of 5.89%. If I've calculated this correctly, it's a good sign that the distribution yield more closely matches the income produced internally.

However the greater concern is that the income stream can keep declining. Junk bonds (which provide HALF the income of XTR) are crashing and it seems likely that bonds will default/reduce their interest payments. Plummeting asset prices also deprive XTR of the capital gains it needs to mask its income shortfalls.


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