Multi-asset exchange traded funds have provided diversified exposure to a group of various asset classes and generated attractive yields, but the investments could falter if rates begin to rise this year.
ETF investors have turned to multi-asset strategies for their diversification, tax efficiency attractive yields. For instance, the First Trust NASDAQ Multi-Asset Diversified Income Index Fund (NasdaqGM: MDIV) bas a 6.08% 12-month yield, iShares Morningstar Multi-Asset Income Index ETF (NYSEArca: IYLD) has a 5.32% 12-month yield and Guggenheim Multi-Asset Income Index ETF (NYSEArca: CVY) has a 6.15% 12-month yield.
However, these investment strategies have been shifting away from traditional stocks and bonds split to generate higher yields. Instead, multi-asset ETFs have a broader mix of equities, bonds and cash.
For instance, MDIV includes a 21.8% tilt toward real estate investment trusts, 20.5% dividend paying stocks, 20.4% preferred securities, 20.2% in high-yield corporate debt and 17.1% master limited partnerships. IYLD holds 19.9% junk bonds, 15.3% mortgage REITs, 15.2% investment-grade corporate debt, 14.7% international dividends and 9.6% emerging market local currency debt.
Consequently, the multi-asset ETFs are now exposed to interest rate risks as many of their underlying holdings are sensitive to rate changes.