Is CVY The Best Income ETF?

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From the lows of second quarter of 2012, to current levels near  pre-recession highs, U.S. equities have had a fantastic run up thus far. Having said this and also considering the present state of affairs for the U.S. investors, the only reason to complain lies in yields.

In fact low yields have for long been a pain for investors and the situation hasn’t changed much either. Actually the primary catalyst behind the surge in equities has caused yields to remain extremely low. And no points for guessing – it is the Federal Reserve’s monetary easing program.(See Real Estate ETFs--Real Winners in 2013?).

In the light of the above, it is prudent to discuss an ETF which 1) provides ample scope for current income by allocating across a variety of high yielding avenues, and at the same time 2) capitalizes on a broad market uptrend that results in capital appreciation.

Allocation Strategy

The Guggenheim Multi Asset Income ETF (CVY) is a semi-active ETF which primarily aims to provide high levels of current income along with a scope of capital growth. The ETF tracks the Zacks Multi-Asset Income Index.

The Index is comprised of a variety of higher yielding investment avenues such as REITs, MLPs and Preferred Stocks as well as other high yielding U.S. equities which provide a good opportunity for capital appreciation. It also invests in Closed Ended Funds (CEF’s) and American Depository Receipts (ADRs).

From individual holdings perspective CVY currently allocates across a portfolio of 149 securities with less than 21% allocation in the top 10 holdings. In fact Intel Corp and Pfizer Inc, are two of its top holdings with around 3% allocation to each. CVY has an asset base of around $950.90 million and charges investors 60 basis points in fees and expenses. (Read 3 ETF Strategies For Long Term Success).

Risks to Consider

In terms of historical volatility, CVY is less risky than the broader market. If we quantify the results we find that the ETF has a three year annualized standard deviation of just 15.80% compared to the S&P 500 exhibiting a three year volatility of 18.52%.

In this regard, one of the most important points to consider out here is that CVY is primarily an allocation ETF. It allocates across a mix of high yielding avenues as well as avenues which provide a decent scope of capital appreciation.

Primarily the higher yielding avenues in its portfolio like MLPs, REITs and Preferred Stocks exhibit  low correlations with. Investing in a portfolio of diverse assets lowers the volatility of ETF. (See Time to Exit Junk Bonds ETFs?).

However, this does not make the ETF alien to the broader picture of U.S. equities. In fact, the responsiveness and correlation of the ETF to U.S. equities is pretty decent as indicated by a Beta value of 0.82 and an R-Squared Value of 91.74% versus the S&P 500 Index.

Also, another very important point to note here is that despite having international exposure, CVY will be free from any currency risk that may understate returns. This is due to the fact that the ETF holds only U.S. Dollar denominated assets. Its international exposure arises out of its allocation to ADRs which are U.S. dollar denominated.

Comparative performance versus Broader Equities

 

The chart above shows the comparative performance of CVY with an S&P 500 tracking ETF, the SPDR S&P 500 ETF (SPY). The chart has been constructed considering a slightly longer term perspective (i.e. 5 years) on the basis of total returns (i.e. dividends plus appreciation) (read Have You Overlooked These Dividend ETFs?).

As we can see, the income ETF CVY returning 43.5% has almost crushed SPY returning 28.04%. Of course, the base effect has a long way to play here as that time the equity markets were facing massive sell offs on account of the sub-prime mortgage crisis. However, considering the shorter term play there is very little to choose from the two ETFs (see more in the Zacks ETF Rank Guide).

While this might mean very little to growth oriented investors as it ultimately sums up to similar total returns, it might prove to be gold dust for conservative income seeking investors primarily due to two reasons (read Is This a Bull Market for Retail ETFs?).

Firstly, it has a solid dividend yield of around 5% which takes care of their current income requirements, and secondly, it gives them a shot at an investment avenue which fetches similar total returns as the broader equity markets but at a comparatively lower level of risk. Or course needless to say the risk is pretty much smoothed out thanks to the robust dividend payments of the ETF.

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