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In the current ultra-low interest rate environment, the traditional sources of income are failing to meet the requirements of the income investors. At present ‘safe’ fixed income instruments yield negative or very low real interest rates and they also come with the risk of capital loss when the interest rates begin to rise. CDs, money market funds and bank deposits yield miniscule returns and fail to protect capital from inflation.
At the same time, the markets are likely to stay volatile during the coming months in view of the sovereign debt issues in Europe, election and looming fiscal cliff in the U.S. and slowing growth in major emerging markets. (Read: Emerging Markets Sovereign Bond ETFs: Safe With Attractive Yields)
Thus maintaining a high level of current income with stability and potential for long-term appreciation, and avoiding down-side risk remains a big challenge for the investors. Thankfully, there are some ETF products that can help the investors overcome these challenges.
Multi-asset ETFs aim to provide a high current income with long-term capital appreciation by investing across different asset classes. These funds invest in diverse asset classes such as investment grade and high yield bonds, domestic stocks, emerging markets, preferred stocks, REITs and MLPs. (Read: Can You Beat These High Dividend ETFs?)
By investing in diverse asset classes, which have low correlations, these ETFs actually reduce volatility and provide stability to the portfolio. Diversified portfolios in general deliver superior risk-adjusted returns over the longer-term. However, it may be difficult, time-consuming and costly for investors to buy individual securities from many different asset classes. Thus, these multi-asset ETFs can be an attractive option for the investors.
Guggenheim Multi-Asset Income ETF (CVY - ETF report)
CVY follows the Zacks Multi-Asset Income Index, which is comprised of approximately 125 to 150 securities selected using a proprietary methodology, from a universe of domestic stocks, ADRs, REITs, MLPs, CEFs and preferred stocks. The objective of the Index is to select a diversified group of securities with the potential to outperform, on a risk adjusted basis, the Dow Jones U.S. Select Dividend Index.
CVY currently holds 146 securities, with an average market capitalization of $26.5 billion. It is currently heavily weighted in financials (31.1%) and energy (21.3%) sectors. In terms of asset-class breakdown, the ETF is tilted towards common stocks (57.4%), while ADRs and MLPs (10.1% each) occupy the next two spots. (Read: Three Low Volatility ETFs For Stormy Markets)
The fund has had an impressive gain of 11.27% in 13 weeks. It charges an expense ratio of 60 basis points per year and currently has a 12 month yield of 5.28%.
iShares Morningstar Multi-Asset Income Index Fund (IYLD - ETF report)
IYLD follows the Morningstar Multi-Asset High Income Index, a broadly diversified index which seeks to deliver high current income while maintaining long term capital appreciation. The Index consists of a comprehensive set of iShares exchange traded funds (ETFs) that collectively target equity, fixed income, and alternative income sources.
The ETF which was launched in April this year has gathered $54.7 minion in assets so far. The fund charges 60 basis points in expenses per year, while the 30-day SEC yield stands at 5.28% currently. The fund has returned 5.95% in 13 weeks. (Read: Three Impressive Small Cap Dividend ETFs)
Current asset class allocation is tilted towards Domestic Fixed Income (44.8%), followed by Domestic Equity (30.0%) and International Fixed Income (15.5%). With 2351 holdings, the fund is well diversified, while the top three holdings are iShares High Yield Corporate Bond ETF (20.0%), iShares Emerging Market Bond ETF (15.5%) and iShares DJ Select Dividend ETF (DVY) are the top three holdings.
SPDR SSgA Income Allocation ETF (INKM - ETF report)
Launched in April 2012, INKM is an actively managed fund of funds that seeks to provide total return by focusing on investment in income and yield-generating assets. The ETF primarily invests in SPDR ETFs, but also includes other exchange traded products. The expense ratio is 70 basis points, while the 30 day SEC yield is 3.97%. The fund is typically rebalanced every month though trading may occur more frequently in response to the market conditions.
Equity (47.1%), investment grade bonds (29.2%) and high yield bonds (8.5%) occupy the top three spots in terms of asset class breakdown. The fund currently has 18 holdings of which top three are SPDR S&P Dividend ETF (18.9%), SPDR Long Term Corporate Bond ETF (11.4%) and SPDR High Yield Bond ETF (8.4%). The ETF currently has $15.2 million in AUM.
The fund has returned 5.99% in 13 weeks.
Other two multi-asset ETFs Guggenheim International Multi-Asset Income (HGI) and Arrow Dow Jones Global Yield ETF (GYLD) have a more global approach in asset allocation and thus a higher risk exposure (and higher potential return) compared with the three ETFs discussed above.
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