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Multi-Asset ETFs Get Some Rate Relief


At the height of the Federal Reserve’s quantitative easing spectacle and when little thought was given to rising Treasury yields, income investors were smitten by multi-asset exchange traded funds.

Under one wrapper, dividend seekers could almost have it all with multi-asset ETFs like the Guggenheim Multi-Asset Income Index ETF (CVY) – common stocks, master limited partnerships (MLPs), closed end funds, real estate investment trusts (REITS), preferred stocks and more. However, it was that diversity in asset classes that weighed on some multi-asset ETFs last year as Treasury yields soared. [Multi-Asset ETFs With Juicy Yields]

CVY gained 19.5%, but that lagged the S&P 500 by almost 1,300 basis points. The First Trust NASDAQ Multi-Asset Diversified Income Index Fund (MDIV) added 10.7% while the iShares Morningstar Multi-Asset Income ETF (IYLD) barely closed higher on the year. As Treasury yields have fallen this year, multi-asset ETFs have found some relief. IYLD and MDIV are both positive on the year while CVY has been less bad than the S&P 500.

The differences between the three funds remind investors that just because ETFs have some of the same words in their names does not mean the funds themselves are the same. [Important Nuances Among Some ETFs]

For example, CVY trounced its rivals last year because its lineup is home to a large amount of U.S. common stocks than its rivals. CVY is home to 150 holdings, none of which account for more than 1.4% of the fund’s weight. Over half of those holdings are either U.S. common stocks or American depositary receipts. That worked last year as REITs and preferreds were punished by rising rates.

With investors bidding up Treasuries this year, sending yields lower in the process, rate-sensitive , income-generating asset classes are benefiting. The $100.1 million IYLD is the top performer this year of the three multi-asset ETFs mentioned here, indicating the fund has gotten a lift from its combined 31% weight to the iShares 20+ Year Treasury Bond ETF (TLT) and iShares Mortgage Real Estate Capped ETF (REM). IYLD, which has a 30-day SEC yield of almost 7.2%, holds 11 iShares ETFs. [10 Unique Sources of Yield]

MDIV, which has amassed $533.8 million in assets in just 18 months of trading, is also higher on the year, cementing the notion that REITs and preferreds are fine places to be…when interest rates fall. Those asset classes combine for almost 40% of MDIV’s weight. Nearly a quart of MDIV’s weight is allocated to common stocks, but a fair amount of that goes to utilities, the top sector to this point in 2014.

First Trust NASDAQ Multi-Asset Diversified Income Index Fund

Tom Lydon’s clients own shares of CVY, REM and TLT.