Q. Yesterday a viewer asked about “YTB”… we know YTM, but what’s this?
A. Well, a bit of an inside joke, but a serious issue for investors. People want high YTM, yield to maturity, with their investments but definitely not YTB– because it stands for “yield to broker”… that is, products with especially high sales charges.
And unfortunately a lot of “alternative” products in the market right now are indeed high “YTB”.
Q. I know that FINRA has warned about non-traded BDCs and non-traded REITS– is this one of the reasons?
A. Yes. I was looking at a non-traded BDC offering this morning that carries an 11% up front fee. If you thought the max allowable by law was 10%, you’d be right: but this is a 10% load plus something called a due diligence fee. That’s high YTB! And its also high yield to manager, because it comes with 2/20 annual fees too.
Q. Pretty hard to overcome fees like that and get a great return, I’m sure. So what other red flags do you tell people to watch out for?
A. Just about anytime you’re offered a non-traded version of something that’s normally traded– like a BDC or REIT or MLP– you want to be careful. After all, Congress gave these special benefits precisely to attract smaller investors with liquidity. And the industry argument– that by not trading they aren’t subject to volatility– is like arguing that you should buy a car with no engine, since, of course, it’ll never be in a crash.
Q. One more?
A. IPOs of traded closed end funds, especially for income products. The underwriter fees come out of the vehicle, which means that only, say, 94% of the dollars actually get invested. With income products that are only earning, say, 5 or 6% anyway, starting off with a diminished amount of principle is not cool. That’s why, almost always, these things trade at a discount right after the initial offering. If you just love the product, wait and buy it in the aftermarket.