CYH is based on two US-listed ETFs from Guggenheim, Claymore’s parent company: 40% is allocated to the Guggenheim Multi-Asset Income ETF (CVY), which covers the US, and 60% to the Guggenheim International Multi-Asset Income ETF (HGI), whose largest allocations are to the UK, Canada and France. In all, CYH holds a widely diversified portfolio of 283 companies with no stock comprising more than 2% of the fund.
The holdings include blue-chip names in many sectors — Nokia, Allianz, Novartis — but the fund is highly skewed to the energy sector. This isn’t obvious if you look at the fund’s fact card, which shows a 20% weighting to financials. In fact, most of the companies classified as financials are income trusts in the oil and gas sectors, not banks or insurance companies.
Now for the complicated part. CYH doesn’t actually hold the two US-listed ETFs upon which it’s based. Instead, it has teamed up with National Bank of Canada to create a type of derivative called a forward agreement. It works like this: Claymore invests CYH’s assets in a portfolio of Canadian non-dividend-paying stocks. Then they periodically swap the returns from these Canadian stocks with National Bank at prices determined by the performance of the Zacks index.
Why such a convoluted structure? Because foreign dividends would be subject to a 15% withholding tax and are fully taxed as income. Thanks to the forward agreement, CYH’s distributions can be characterized as return of capital, which is non-taxable, or as capital gains, which are taxed at half the rate of regular income. (While this sounds like financial sleight of hand, forward agreements are common in the industry and not a cause for concern.)
When CYH was launched in January 2008 it had a yield of almost 9%, but that year it lost about 41% — of course, so did a lot of other equity funds. In 2009 the fund returned 47.5%, considerably more than the overall equity markets. The ETF’s tracking error was high in both years: –3.2% in 2008, and –1.5% in 2009. So far in 2010 it has returned just over 6%, most of which has come from its monthly distributions (the fund currently yields 4% annually). The ETF hedges foreign currency exposure, so the index returns are measured in Canadian dollars.
In the liquidity department, this ETF has some concerns. Given the wild popularity of dividends these days, I’m surprised the daily trading volume averages only about 13,000, compared with more than 100,000 for Claymore’s S&P/TSX Canadian Dividend ETF. It’s also common to see a large gap between the fund’s net asset value (NAV) and its market price. If you’re considering investing in CYH, you’d be wise to place a limit order.
The alternatives: No other Canadian ETF provider offers an international dividend-focused index fund. However, Horizons AlphaPro recently launched the actively managed Global Dividend ETF (HAZ), which is approximately 50% in US stocks, 11% Canadian and 39% international.
There are innumerable ETFs in this category from US providers such as Vanguard, iShares, PowerShares, State Street Global Advisors and WisdomTree.