Earning income from commodity investments typically requires some work and creativity on the part of investors. After all, gold bars and barrels of oil don’t pay out any income in and of themselves. That means that investors who want yield from their commodity investments need to either periodically sell part of their position to replicate income, or they need to invest in shares of commodity-related companies that do pay dividends.
As is often the case, ETFs can offer many advantages to investors (like enhanced diversification). When looking at high-yield ETFs, though, investors need to exercise some caution. Like mutual funds, ETFs will sometimes include capital gains distributions and/or returns of capital in addition to ordinary income dividends. In the case of commodity ETFs, investors also need to realize that the dividend payout of many foreign companies can vary significantly from year to year and may include special dividend payments that boost the backward-looking yield numbers [for more commodity ETF news and analysis subscribe to our free newsletter].
- Market Vectors Rare Earth/Strategic Metals (REMX): Van Eck’s MV Rare Earth ETF focuses on companies that produce rare earth metals like cerium or yttrium that are used in a wide array of industrial and technical applications, as well as strategic metals like titanium and tungsten. This is a relatively liquid fund, with over $150 million in net assets. With less than 18% of the fund’s holdings domiciled in the United States, the impact of foreign company dividend policies could be even more significant here. REMX currently offers a yield of 7.2%, but many of the fund’s major holdings like Eramet, Titanium Metals and Lynas feature much smaller payouts at present [see also Dividend Special: Four Commodity Stocks Yielding Over 5%].
- Market Vectors Junior Gold Miners (GDXJ): With a dividend yield that is indicated at more than 6.7% by some data providers, Van Eck’s MV Junior Gold Miners ETF is the first example in this list of how capital gains distributions can inflate and distort reported yield. Adjusting out those gains drops the yield to about 5.1% – still good enough for the #2 position on this list, but perhaps enough of a difference to offer a nasty surprise to an investor caught unawares. Given the frequent hefty capital spending demands of gold and silver exploration, a fund of small/mid-cap miners would not typically be expected to offer a consistent high dividend payout. This is a very liquid fund, though, with nearly $3.2 billion in net assets.
- Global X Uranium (URA): The Global X Uranium ETF is another example of where reported distributions and the dividend payouts of major portfolio holdings don’t quite seem to add up. This fund paid a $0.39 per share distribution for 2011 (good for a 4.9% yield today), though only two of its holdings were categorized as “income-producing securities.” Not surprisingly, about 10% of the distribution was actually a return of capital, and investors likely ought to expect a lower yield in the future. On its own merits, the Global X Uranium ETF is somewhat thinly traded and holds about $158 million in net assets [see also Dividend Special: Top Companies In Every Major Commodity Sector].
- Global X Copper Miners (COPX): The Global X Copper Miners ETF is another example of how capital gains distributions can artificially inflate the yield on a fund. While the listed payout of $0.91 would suggest a whopping 7% yield on these shares, more than a third of that came from short- and long-term distributions. Adjusting those out leaves a still-impressive yield of over 4%. It’s also worth noting that this fund is neither very liquid (a 3-month average daily volume below 25,000), nor very large (a net asset value below $35 million). That said, with positions in companies that pay out meaningful dividends (including Southern Copper, KGHM Polska, and Antofagasta), this looks like it ought to be a reliable source of dividend income provided that copper prices do not crater.
- EG Shares Emerging Markets Metals/Mining (EMT): EGShares Emerging Markets Metals/Mining ETF is a diversified ETF that invests in a wide range of commodity companies domiciled (though not necessarily listed) in emerging markets. For instance, companies like Brazilian mining giant Vale, Russia’s Norilsk Nickel, and China’s large coal company China Shenhua Energy make up close to one-quarter of the fund’s portfolio. Moreover, given that the aforementioned companies offer current dividend yields of 6.3%, 3.7%, and 3.4% respectively, it would seem that this fund should continue to be in position to offer a solid annual dividend. Unfortunately, this is a tiny fund (less than $12 million in NAV) with minimal volume (less than 3,000 a day on average) [see also Want Juicy Dividend Yields? Buy the Top Five Commodity Megacaps].
Disclosure: No positions at time of writing.