# Is there a catch in Claymore FIE 7.3% yield?



## Eric (Oct 20, 2009)

Claymore Canadian Financial Monthly Income (FIE) invests mostly in banks and has a dividend over 7% while its individual holdings give, at best, 5%.

I presume the only way they can achieve this result is by being very active in buying and selling, which could explain their high MER of 1.24%. 

It seems good to me but I wonder if there is a catch somewhere.


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## humble_pie (Jun 7, 2009)

intrigued by your how-does-5%-become-7% puzzle, i zipped through their literature & last financial report, expecting to find utilization of futures & options to boost returns.

did not find any options. Nor are they geniuses at market timing. What i did find is that just under half the portfolio consists of the big 6 chartered banks. The rest is invested across the financial spectrum, including some reits & income trusts that are paying quite high.

the sore thumb that stuck out was that 15% loan of NAV that they have got running on a daily basis. This permits them to oversubscribe the portfolio. It's the difference between what they are making on the dividends from shares purchased with borrowed capital & what they have to pay to the bank as interest that permits them to pay out that extra 2% which has caught your eye.

some folks here in this forum are doing the same thing. They borrow to invest. This is fine as long as a) monies earned by investments can pay the loan; and b) value of shares purchased with borrowed funds does not collapse.


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## Mike59 (May 22, 2010)

This is similar to the age-old questions about "monthly income" mutual funds. 

How can one promise to deliver a high yield month on month without risk? To guarantee an income that high, the catches could include: 

- Interest rate risk (given the corporate bond holdings and preferred shares)
- Return of capital , this could lower share price
- Market risk: If banks and insurance companies cut their dividends during a downturn, then what?

In there present day where only a 1 % GIC is certain, any fund that promises a yield over 4% is forcing me to accept risk that is probably not worth taking.


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## Eric (Oct 20, 2009)

humble_pie said:


> the sore thumb that stuck out was that 15% loan of NAV that they have got running on a daily basis. This permits them to oversubscribe the portfolio.


Thank you, humblePie. You seem to have solved the dilemma. So this ETF involves more risk than the banks it owns. Although they do have some high yield items, it is surprising that a 15% over-subscription is enough to raise the dividend by 40%.


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## humble_pie (Jun 7, 2009)

i certainly agree re the payout. Wringing an extra 40% in income out of borrowing 15% in capital as unusual success also crossed my mind, but i didn't take the time to mention.

my speculative thought goes like this: borrowing cost of the loan is amortized over the entire portfolio & forms part of the relatively high MER that you have already remarked upon. Shares bought under the loan program may be among the hi-dividend group. And that is at least one way claymore manages to boost the monthly payout. Please keep in mind that i whizzed through the documentation with the speed of light. Others will no doubt find much better information.

presumably all will be well for FIE on the interest rate front, ie rates will remain low enough for the loan to be successful. What could be unfortunate could be more precipitous drops in value of the underlying shares. I'm thinking along the lines of pay-back-the-loan-lower-the-payout-plus-plunging-markets-will-lead-to-double-whammy-for-FIE.

however, if one is neutral-to-bullish on markets in general including the troubled finance-related sector, FIE might not be a bad idea imho. This fund's income is said to take the form of dividends & capital gain, so it is a tax-favoured alternative to HISA for those willing to face the risk.

fee fie fo fum
i smell the blood of cmf forum.


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