Since my first sell rating on Amplify High Income ETF (NYSEARCA:YYY) in February 2021, its share price is down -27% and its total return is +9% (before tax on distributions), while the S&P 500 index has gained 42%. Although YYY has performed decently in the last 10 months, this article renews my long-term negative opinion in the light of updated data.

YYY strategy

Amplify High Income ETF (YYY) is a high-yield fund that launched on 6/21/2013 tracking the ISE High Income Index. It has a portfolio of 60 closed-end funds (CEFs), a distribution rate of 11.85% and a 30-day SEC yield of 10.45%. The expense ratio is extremely high, even compared with other funds of funds: 0.50% in management fees plus 4.10% in held fund expenses, totaling 4.60%! You must see it to believe it:

As described by Amplify ETFs, the underlying index:

selects CEFs ranked highest overall by ISE in the following factors: Yield, Discount to Net Asset Value (NAV), and Liquidity. This investment approach results in a portfolio which contains a variety of asset classes, investment strategies and asset managers.

Eligible funds must be listed in the U.S., have a capitalization of at least $500 million and an average daily trading volume of at least $1 million. They are ranked based on a score including 3 factors: yield, discount to NAV and liquidity. Constituents are selected and weighted based on their score, with some adjustments. The index is reconstituted twice a year, in January and July.

The fund changed names in 2019, keeping the same ticker and methodology. The methodology changed in July 2021: the number of holdings increased from 30 to 45, the constituent weight was capped at 3%, and the reconstitution became semi-annual (previously annual). It seems there was another modification in 2024, resulting in an inconsistency on Amplify ETFs website as of 9/6/2024: it reports a list of 60 holdings, while the index methodology document still claims that “the Index seeks to have 45 components, that number should be considered a maximum limit”. I don't like funds that change their methodologies: it may be a clue of failing strategy.

Portfolio

BlackRock is the heaviest fund sponsor in the portfolio (23% of asset value), followed by abrdn (15%) and Nuveen (14%). As of writing, YYY is diversified across asset classes: 59% of asset value is in bonds and 41% in stocks. These numbers may change over time. The heaviest subclass is senior loans, with 16% of assets. The top 10 holdings, listed in the next table, represent 32.2% of asset value, and the heaviest position weighs 3.92%. Therefore, the portfolio is well-diversified and risks related to individual funds are low to moderate.

Closed-end funds are often chosen by investors for their high yields. They also have a few metrics that are not applicable to stocks and ETFs. Two of them are more important than the yield:

• Discount to NAV (higher is better);
• Relative discount = Discount to NAV minus its 12-month average (higher is better).

The latter is meaningful because the discount often shows a mean-reversion pattern. The next table compares these metrics in the full CEF universe and a sample of 37 holdings of YYY (excluding those for which my data provider doesn’t have all the information).

Calculation with Portfolio123

This sample of holdings is a bit inferior to the CEF universe regarding these valuation metrics, so YYY valuation is likely slightly below-par.

Past performance

Since 7/1/2013, YYY has underperformed its largest competitor, Invesco CEF Income Composite ETF (PCEF). The next table also includes a benchmark of mine: a simulated portfolio of the 100 CEFs with higher yields among those with an average daily trading volume above $100,000 and a positive discount. It is reconstituted twice a year in equal weight to make it comparable to the underlying index.

Data calculated with Portfolio123

YYY underperforms in total return, and also in risk-adjusted performance (Sharpe ratio). However, it is marginally ahead of PCEF over the last 12 months:

The annualized return, including distributions, is below the distribution rate’s historical average (which is over 8%). It means YYY paid high yields while it was suffering a decay in value. The next chart confirms it: the share price has lost 46% since 7/1/2013. Adding to the pain, the cumulative inflation in the same time was over 30%, based on CPI data. PCEF was a bit better at preserving capital, although a 20% loss isn’t pretty either.

The distribution history isn’t more attractive. The annual sum of distributions decreased from $2.06 per share in 2014 to $1.44 in 2023. For shareholders, it’s a 30% loss of income stream in 9 years, while the cumulative inflation was about 30%.

Takeaway

Amplify High Income ETF may be used in short-term trades to profit by some market anomalies. However, it has been a bad long-term investment since its inception in 2013, showing a significant decay in value and distribution. It is unlikely to suddenly become a winner. Anyway, its ridiculous expense ratio of 4.60% is sufficient reason to avoid it.