What a difference a year makes. Last year’s “tantrum” resulting from the specter of tapering of its quantitative easing by the Federal Reserve was a drag on multiple corners of the exchange traded products universe, including multi-asset ETFs.
At the height of the Federal Reserve’s quantitative easing spectacle and when little thought was given to rising Treasury yields, income investors were enamored of high-yielding multi-asset ETFs. For income investors, there is a lot to like with ETFs such as the First Trust NASDAQ Multi-Asset Diversified Income Index Fund (MDIV) and the Guggenheim Multi-Asset Income Index ETF (CVY) , one of the elder statesmen of the multi-asset ETF group. [High-Yield Multi-Asset ETFs]
MDIV features a 12-month distribution of almost 6%, the result of its lineup of nearly 120 holdings being comprised of a mix of junk bonds, master limited partnerships (MLPs) and real estate investment trusts (REITs), among other asset classes.
That composition makes MDIV appealing in sanguine rate environments, but not so much when Treasury yields surge as they did last year.
“There’s a downside to MDIV. Its diverse exposure and extremely low volatility mean it won’t participate in much of the upside of the U.S. equity markets. Last year, for example, it rose 11 percent when the market was up 32 percent. If interest rates were to rise quickly, many of the holdings in MDIV could lose value. Mortgage REITs in particular, which yield about 15 percent, could be hit hard, since they use short-term loans to buy mortgage-backed securities and generate income from the difference between the two,” writes Eric Balchunas for Bloomberg.
In addition to CVY, another MDIV competitor is the iShares Morningstar Multi-Asset Income Index ETF (IYLD) . Over 20% of IYLD’s weight goes to common stocks as three iShares dividend ETFs, including the iShares High Dividend ETF (HDV) , make up the ETF’s 10 holdings. [All-in-One ETFs]
IYLD has a trailing 12-month yield of 5.9%, but the ETF also has its own sensitivity to U.S. interest rate changes as longer-dated Treasuries and mortgage REIT ETFs combine for almost 29% of IYLD’s weight.
“A bond-heavy approach weighed on IYLD last year, and it was up only 1 percent. Its other notable downside is a lack of exposure to MLPs and preferred securities,” according to Balchunas.
First Trust NASDAQ Multi-Asset Diversified Income Index Fund
Tom Lydon’s clients own shares of CVY and TLT.