All-in-One ETFs with Attractive Yields
December 10th, 2012 at 6:00am by Tom Lydon
Considering that the Treasuries market is still hovering around historically low rates, investors are diversifying their income-generating assets, but some may be taking on more risk. Nevertheless, with exchange traded fund options, yield hunters can gain exposure to a diversified basket of assets with decent payouts.
Recently, investors have been piling into high yielding assets. For instance, U.S. high-yield bond mutual funds garnered $28 billion, or twice as much as in all of 2011, while others have jumped on high-dividend equity and emerging market bond funds, reports Michael A. Pollock for the Wall Street Journal. As with all things that can potentially generate better returns, these assets come with greater risks.
Nevertheless, potential investors can consider a single, all-in-one fund, or diversified income-investment strategy, that holds both bonds and stocks and would tactically shift allocations based on current market conditions. [‘New Breed’ Income ETFs for a Low-Yield Market]
But before diving head first, there are some things to consider.
- Credit quality. For fixed-income assets, prices and yields move in opposite directions. High-quality bonds can be vulnerable to interest rate risks as economic activity picks up and inflation rises. On the other hand, non-investment grade, or “junk,” bonds are less sensitive to rate moves but are subject to greater volatility since they are more correlated to the equities market. “Investors aren’t chasing fundamental value anymore in high-yield, and I think that could end in another train wreck,” James Swanson, chief investment strategist at MFS Investment Management, said in the article.
- Allocation strategy. Typically, financial planners will have exposure to a range of bonds and equities. For instance, the James Balanced Golden Rainbow fund had about half its holdings in U.S. stocks, while the Vanguard Wellesley Income fund had over a third in U.S. or foreign stocks – both are considered “conservative allocation” funds since they have a higher bond exposure.
- Flexibility. Investors should consider how often a fund rebalances and if the underlying allocations provide a suitable exposure for their investment objective. Typically, a fund a with broader range of asset exposure, such as one that includes municipals, Treasuries, corporates and international holdings, among others, would spread the risk and act less volatile than those with more concentrated holdings.
- All-in-one. The all-in-one strategy would continually adjust exposure to bonds, stocks and other income-generating securities to capitalize on changes in the market. According to Morningstar, these strategies are often classified as conservative-allocation funds.
ETFs also offer bundled, all-in-one investment products. Investors will find that the ETF options come with a much lower management fee than traditional funds. Some options include the Guggenheim Multi-Asset Income ETF (NYSEArca: CVY), which has a 0.78% expense ratio and a 5.21% 30-day SEC yield, iShares Morningstar Multi-Asset Income Index Fund (NYSEarca: IYLD), which has a 0.60% expense ratio and a 6.78% 30-day SEC yield, and SPDR SSgA Income Allocation ETF (NYSEArca: INKM), which has a 0.70% expense ratio and a 4.70% 30-day SEC yield. [Multi-Asset ETFs For Yield and Stability]
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.