Multi-Asset Income ETFs Come Of Age
Multi-asset income ETFs are here to stay, as the Guggenheim Multi-Asset Income ETF’s (CVY) recent crossing of the $1 billion threshold in assets clearly suggests.
CVY launched in 2006, and has enjoyed the role of first-mover in the space, but newcomers to the pocket of multi-asset income funds are benefiting from investor interest too.
The most recent entrant, the First Trust Multi-Asset Diversified Income ETF (MDIV), has pulled in $360 million in net new investor money so far this year, leading all peer funds in net inflows and bringing its total assets under management to $440 million. It came to market in August of last summer.
This is far from a two-horse race, however.
In addition to First Trust’s MDIV, three other funds had successful launches in 2012 as well:The SPDR SSgA Income Allocation (INKM), the iShares Morningstar Multi-Asset Income Index Fund (IYLD) and the Arrow Dow Jones Global Yield ETF (GYLD).
After about a year on the market, each fund holds assets in the $80 million to $170 million range, signaling a successful launch.
CVY’s sister fund, the Guggenheim International Multi-Asset Income ETF (HGI), rounds out the space, with $124 million.
Given the crowded field, I’ll focus on the two top funds by assets, CVY and MDIV.
Scorecard
MDIV holds the edge on yield over CVY, with a 12-month yield (the sum of dividend per share amounts over the last 12 months divided by the current share price) of 5.5 percent versus 5.0 percent for CVY. MDIV’s indicated yield—the most recent dividend, annualized, divided by current share price—comes in at 6.7 percent, beating CVY’s 5.2 percent, according to data from Bloomberg.
CVY holds the year-to-date total-return edge, however. Through May 21, CVY has returned 15.6 percent to MDIV’s 14.8 percent.
Why Multi-Asset Income ETFs?
Before I dive into the portfolios that drove performance for these two funds, let’s take a step back.
Multi-asset income funds have a broad mandate in their quest for yield. While there’s no shortage of income plays these days, most are confined within their respective asset class or subasset class buckets. Dividend funds hold equities and maybe some REITs. High-yield funds hold junk bonds. MLP funds focus on royalty-paying infrastructure pass-through partnerships.
In contrast, multi-asset income ETFs have the freedom to roam across asset classes in search of yield.
In this sense, the funds move upstream, from ETFs-as-building-blocks to ETFs-as-allocators. This distinction is nontrivial in my view, as the funds encroach into the space where advisors, registered investment advisors and other professionals earn their keep as allocators.
Still, finding the best mix of high-yielding assets isn’t in every advisor’s wheelhouse, even if they have the time to try. Here’s how the CVY and MDIV skin the cat.
Asset Breakdowns
CVY overwhelmingly favors equities, and its top three names are Intel, Pfizer and Verizon. At first glance, this doesn’t exactly smack of “multi-asset.”
Note, however, that the CVY’s equity allocation includes substantial stakes in REITs and MLPs, which are excluded from some plain-vanilla equity dividend ETFs. CVY allocates about 8 percent to preferred stocks—those hybrid securities with perpetual cash flows that straddle fixed income and equity.
In contrast, MDIV takes a smaller stake in equities, although it holds more REITs and MLPs than CVY.
MDIV has roughly twice the exposure to preferreds compared with CVY, and has a much larger allocation to high-yield corporate bonds too. MDIV gets its junk bond exposure via another ETF, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG).
In all, CVY’s equity basket looks more like a conventional dividend fund, with slightly lower yield compared with MDIV, but with strong returns powered by a surging equity markets. CVY’s returns seem more susceptible to slumping if the wheels fall off the equity rally.
MDIV meanwhile dials up exposure from other asset classes, which gooses yield as it increases other risks (interest rate, credit risk from junk bonds and tax-uncertainty risks from MLPs).
While neither fund is particularly cheap to hold, MDIV holds the edge on fees, with an annual expense ratio of 62 basis points, compared with CVY’s 77 basis points.
Both funds trade well, consistent with strong and growing assets under management:CVY has slightly tighter spreads, but MDIV has more daily volume.
What all this means is that the multi-asset income space has matured. Investors now have a range of viable ETF choices, backed with real assets and liquidity.
CVY, MDIV and the other funds mentioned here provide off-the-shelf, diversified exposure to a variety of yield-producing assets in a transparent, tax-efficient wrapper. They also provide a nice contrast to the precise but narrowly focused exposure from ETFs covering individual yield-producing asset classes.
At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at pbritt@indexuniverse.com.
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