Why, why, why?

Dear Mr. Berko: My wife and I are both seniors and have a $20,000 certificate of deposit coming due at Wells Fargo. We told the teller that we won't renew the CD because the rates are too low. The teller introduced us to a Wells Fargo stockbroker, who wanted to sell us an annuity. We know that the annuity is not suitable, so we declined and visited another broker. He recommended we buy 1,000 shares of YieldShares High Income ETF at $18.58 because it pays 10.6 percent. That is an impressive yield and more than twice as much as AT&T's, which my wife looked at and thinks we should buy. We both have good pensions and Social Security and no debts. We know nothing about the stock market and need your advice. Please help us make a decision. How should we invest this money? We have nearly $170,000 invested in good electric utilities that we've bought over the past 18 years.

- SM, Wilmington, N.C.

Dear SM: I'm not surprised that the Wells Fargo guy recommended an annuity; those guys do that a lot. And they're supposed to. I'm surprised the second broker didn't try to sell you a mutual fund with a 6 percent commission. They do that a lot, too. I'm also surprised he recommended the YieldShares High Income ETF (YYY-$18.60), which, in my opinion, is even more unsuitable than the annuity your Wells Fargo guy was pushing.

I believe you'd have less than a 50-50 chance of receiving continued high income with YYY, which is an exchange-traded fund. YYY invests 80 percent of its $80 million in assets in funds in the ISE High Income Index. Because the ISE High Income Index owns securities issued by other investment companies, YYY is called a "fund of funds." Management invests its assets in those funds in hopes of emulating the performance of the top exchange-listed closed-end funds. It's pure junque!

Because YYY is a fund of funds, its investment performance depends on the investment performance of the underlying funds in which it invests. That's not good. YYY's annual operating costs are 1.82 percent. Therefore, a $20,000 investment in the first 12 months of ownership would cost you $364 in fees. And if YYY were to have an annual 5 percent appreciation and operating expenses were to remain the same, the fees to own YYY for 10 years would be $4,274. Think about it; that'd be turnpike thievery and 22 percent of your investment costs.

Now get this: YYY also pays a proportional share of the fees and expenses of the underlying funds in which it invests. And you don't need to have a Fields Medal in math to figure out that the ETFs owned by YYY have similar operating costs, some of which are more than 1.82 percent. So as YYY takes its 1.82 percent fee and the ETFs in its portfolio take, say, identical fees, the poor schnook who owns YYY is paying 3.64 percent of his portfolio value. In other words, YYY has to earn 14.26 percent to pay you 10.62 percent. So there's gotta be some unbelievably high-yielding junk there.

To make matters worse, the young lady at YYY with whom I spoke told me that management borrows money to buy the ETFs in its portfolio. And by the way, the ETFs in the YYY portfolio also borrow money so they can fill up their portfolios. This is called leverage and works well in rising markets. But if Federal Reserve Chairwoman Janet Yellen were to raise interest rates (from my catbird seat, she shouldn't), leverage could amplify your losses geometrically. And that could be a bummer.

I think your spouse's preference for AT&T (T-$40.25), at a 4.5 percent yield, is a solid choice. Then include AmeriGas (APU-$43), yielding 8.2 percent, and W.P. Carey (WPC-$67), yielding 5.9 percent. Invest $6,600 in each issue and your first 12-month dividend will be about $1,300, which should increase modestly each year. Use one of the larger discount brokers to make these purchases. Fidelity will charge you less than $25 to buy all three issues, whereas Merrill Lynch might charge you $200.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@ yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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Published: Thu, Jun 23, 2016