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3 Multi-Asset ETFs for Q3

Sweta Killa

After being hit hard by a harsh winter in the first quarter, the U.S. economy, undoubtedly, regained momentum in the second quarter on improving global economic conditions. This resulted in significant gains across all asset classes in the first half of the year (read: US Economy Warms Up After Frigid Winter: 3 ETFs to Watch).

In fact, the S&P 500 hit fresh highs 22 times in the year and completed the longest stretch of quarterly gains in 16 years with the end of Q2. Nasdaq too recorded its longest streak of quarterly gains in 14 years. The developed and emerging stock markets, as depicted by IShares MSCI EAFE Index (EFA) and iShares MSCI Emerging Markets Index (EEM), also gained nearly 4% and 6%, respectively.

Meanwhile, fixed income and commodity ETFs have seen strength as the ultra-popular Vanguard Total Bond Market ETF (BND) added over 2% while PowerShares DB Commodity Index Tracking Fund (DBC) is up over 3% in the first half. The remarkable performance in all asset classes was credited to mixed economic sentiments as well as turmoil in the Middle East.  

The trend is likely to continue in the third quarter as well. This is especially true as summer months are generally characterized by lower volumes and higher volatility that could lead to more ups and downs across various asset classes compared to other seasonal trends. In addition, uncertainty over the Fed policy related to interest rates, weak corporate earnings and lofty valuations continue to weigh on global equity markets. The yields on 10-year Treasuries reached their lows compelling investors to look to other high yielding avenues.

Further, Q3 could be a quarter of geopolitical tensions if Ukraine and Iraq issues aggravate. The inherent risk in the quarter that just began is not only financial but also political (read: Volatility ETFs Crash Signaling Further Volatility?).

As such, the global markets are likely to stay volatile during the coming months and investors need to find out the technique to earn higher returns in a choppy environment. Thankfully, there are some ETF products, which can help investors to take a flight of safety and overcome these challenges in a diversified way. The products actually belong to the multi-asset family.

Multi-asset ETFs offer huge diversification benefits by investing across different asset classes, which have low correlations thereby reducing overall volatility. These aim to provide a high level of current income with stability and potential for long-term appreciation while simultaneously avoid downside risk of specific asset class. Below, we have highlighted three such ETFs:
Multi-Asset ETFs to Consider

SPDR SSgA Multi-Asset Real Return ETF (RLY)

RLY is a fund of 13 funds as it seeks to track the performance of a market index, exchange traded commodity and exchange traded notes. The ETF is highly concentrated in the top two funds – SPDR S&P Global Natural Resources ETF (GNR) and PowerShares DB Commodity Index Tracking Fund (DBC) – at 31.4% and 22.1%, respectively. Other funds do not hold more than 12.3% of total assets (read: 3 ETFs to Cash in on Aging Global Population).

In terms of asset class perspective, international equity makes up for 36.1% of assets, domestic equity accounts for 30.6% share while commodities (22.1%) and domestic fixed income (8.5%) round off to the next two spots. The fund has amassed $138.9 million in its asset base. Being actively managed, initial fees came in much higher at 70 bps compared to many traditional funds.

The ETF has added 6.8% so far in the year and has a decent 30-day SEC yield of 1.83%.

iShares Morningstar Multi-Asset Income Index Fund (IYLD)

IYLD follows the Morningstar Multi-Asset High Income Index, which consists of a comprehensive set of iShares ETFs that collectively target equity, fixed income, and alternative income sources. The fund has accumulated $158.5 million in assets so far since inception and charges 60 bps in annual fees from investors.

The product has 11 ETFs with underlying 3,342 securities in its portfolio. Current asset class allocation is tilted toward domestic fixed income with 33% share, followed by domestic equity (30.5%) and international fixed income (24.4%). The top three holdings are iShares iBoxx $ High Yield Corporate Bond ETF (HYG), iShares 20+ Year Treasury Bond ETF (TLT) and iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM) that make up for at least 15% of assets each.

IYLD returned 8.5% in the year-to-date period and has an outstanding 30-day SEC yield of 6.39% (read: Market Beating Sector ETFs of 2014's First Half).

SPDR SSgA Income Allocation ETF (INKM)

This 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. Expense ratio came in at 0.70%, while the 30-day SEC yield is 3.40%.

With AUM of $103 million, the product holds 20 ETFs in its basket with the largest allocation to SPDR S&P Dividend ETF (SDY) and SPDR Barclays Long Term Corporate Bond ETF (LWC) that make up for a combined 29% share. Equity (42.6%), investment grade bonds (29.3%) and global real estate (12.8%) occupy the top three spots in terms of asset class breakdown. The fund has gained nearly 8% in the year-to-date time frame.

Bottom Line

Though these products generally see weak trading, they have outperformed individual asset classes in the year-to-date time frame (see: all the Multi-Asset/Total Portfolio ETFs here).

This is because diversified portfolios in general deliver superior risk-adjusted returns over the longer term. Investors should definitely consider these multi-asset ETFs in their portfolio for stability amid market turmoil.

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