After years of near-zero interests rates, it seems as though there’s finally some relief ahead for savers. This year, yields on three-month Treasury bills have more than doubled, rising from 22 basis points (0.22 percent) to 51 basis points in early December. Granted, an uptick of 29 basis points isn’t going to make anyone rich, but it’s still the most sustained rate increase in more than a decade.
It’s hard to live on just 51 basis points. Even though the Federal Reserve is expected to continue raising rates, yields aren’t likely to be ratcheted up to more normative levels any time soon.
No wonder investors have sought out alternative sources for income. Multi-asset exchange-traded products (ETPs) have been especially popular—portfolios packed with a variety of high-yield securities including real estate investment trusts (REITs), master limited partnerships (MLPs), closed-end funds (CEFs) and business development companies (BDCs), among others. The yields on these products can be mouthwatering, with some reaching into double digits—a real rarity nowadays.
These ETPs are designed to give investors, especially those in or close to retirement, the potential for growth together with their diversified income streams. Some shoot to give investors lower volatility compared to a more traditional stock and bond portfolio; they may and they may not. It really depends upon the products’ asset allocation. There are, after all, several interpretations of the term “multi-asset.”
Even though these ETPs provide income, they don’t necessarily diversify away from equity risk like a bond fund might, so investors need to balance potential concentration of risk against any ramp-up in their cash flows from their allocations.
Fees may also be problematic. Even though ETPs are known to be more cost-efficient than comparable mutual funds, their total expense can sometimes surprise investors. ETPs based on a “funds-of-funds” model can be particularly costly compared to those tracking direct investments in securities.
Let’s look at some multi-asset ETPs currently offering dividend yields above 5 percent.
Yields – At a Price
The YieldShares High Income ETF (NYSE Arca: YYY) focuses on high-yielding CEFs trading at wide discounts to NAV together with the requisite liquidity to keep trading costs relatively low. Still, the price for YYY’s double-digit yield is steep; its annual expense ratio is 1.86 percent. Price volatility, too, is higher than the market at 13.79 percent. Despite all that, YYY clocks in at a very respectable 1.10 Sharpe ratio, the measure of risk-adjusted returns.
Another CEF-based product that uses criteria similar to YYY is the Claymore CEF-Linked GS Connect ETN (NYSE Arca: GCE). The essential distinction between YYY and GCE is that the former is an exchange-traded fund (ETF) and the latter an exchange-traded note (ETN). That introduces credit risk into the investment equation. Should GCE’s issuer—Goldman Sachs, now rated A3 by Moody’s—go wonky, noteholders could get wiped out.
GCE, too, is the only ETP reviewed here that makes quarterly income distributions; all the others pay monthly. GCE’s annual volatility is 11.72 percent which pegs its Sharpe ratio at 1.09. Expenses run 0.95 percent annually.
The Global X SuperDividend Alternatives ETF (Nasdaq: ALTY) takes a diverse approach to snagging yield by dividing its assets into four buckets—alternative fixed income CEFs, MLPs and other infrastructure-related equities, private equity and BDCs and lastly, REITs. Holdings are weighted equally within each bucket, while the buckets themselves are weighted by trailing volatility.
The pass-through costs for these assets drives ALTY’s expense ratio up to 2.86 percent, making it the priciest ETP reviewed here. The fund earns a 1.11 Sharpe ratio despite its 13.86 percent annualized standard deviation.
High-cost is also a feature of the PowerShares CEF Income Composite Portfolio (NYSE Arca: PCEF), though at 1.94 percent, PCEF’s annual expense seems a bargain compared to ALTY. Perhaps that’s because PCEF allocates to only three buckets, including CEF concentrations in investment-grade fixed income, high-yield fixed income and option-writing.
PCEF, like the other CEF-focused products, targets discounted assets to boost yields. The fund earns an impressive 1.31 Sharpe ratio largely due to its low 8.29 percent annualized volatility.
REITs, MLPs, BDCs and debt-based CEFs make up the Master Income ETF (NYSE Arca: HIPS). HIPS is modestly priced with an annual expense ratio of 75 basis points but also appears quite volatile. The fund’s 18.73 percent standard deviation, coupled with a 90 percent turnover rate, yields a low 0.79 Sharpe ratio.
The Arrow Dow Jones Global Yield ETF (NYSE Arca: GYLD) makes wide-ranging and direct investments in sovereign and corporate debt, real estate, energy, equities and alternatives. True to its name, GYLD looks abroad to augment its domestic holdings. About half of the fund’s exposure is outside the United States. That drops the fund’s correlation to the domestic market to 0.68, making GYLD more useful as a portfolio diversifier. A 90 percent turnover rate raises internal trading costs, however. Coupled with an annualized volatility of 18.29 percent, that gives GYLD a bottom-scraping 0.19 Sharpe ratio.
Asset bucketing is again featured in the First Trust Multi-Asset Diversified Income ETF (Nasdaq: MDIV) which spreads its investments more or less equally over common stocks and depository receipts, preferred securities, REITs, MLPs and high-yield bonds.
Keeping these five buckets aligned, however, is costly. Turnover runs at 116 percent which cuts deeply into the fund’s return. While the 10.36 percent overall volatility is modest, MDIV’s 0.77 Sharpe ratio is well below average. Investors may appreciate the fund’s low 68 basis point annual expense but need to be cognizant of its 0.86 correlation to the broad stock market.
The other ETN in our mix, the Credit Suisse X-Links Multi-Asset High-Income ETN (NYSE Arca: MLTI), takes a hybrid approach by tracking a nominal mix of direct investments and ETFs in global assets such as BDCs, REITs, domestic and international equities, preferred and convertible securities, high-yield bonds and emerging market debt.
Aside from the credit risk, Credit Suisse’s senior unsecured debt was recently downgraded to ‘A2’ by Moody’s. MLTI has a lot to offer: a relatively low price volatility of 10.44 percent, a Sharpe ratio of 1.16, correlation to the U.S. stock market at 0.68 and an annual holding expense of 84 basis points.
Should You or Shouldn’t You?
There’s no doubt that multi-asset ETPs offer steroidal yields, but holdings such as MLPs, mortgage REITs and other alternative assets present more risk than traditional income-producing assets. Volatility can also be scary. The broad U.S. stock market has been wobbling at a 12.50 percent annualized rate recently. While the market-weighted standard deviation for the ETPs examined here is just 9.89 percent, some products (namely HIPS and GYLD) can be twice as volatile. That, perhaps, makes a case for using more than one ETP. A 50-50 mix of HIPS and YYY, for example, would have knocked annualized volatility down more than four percentage points over the past year.
The key benefit of using these ETPs is the ease they offer in entering and exiting the asset class. One transaction, instead of many, affords even the smallest investor exposure to high-yielding assets that may be otherwise inaccessible. There’s a discipline, too, imposed by the ETP structure. The index methodologies followed by all the products examined here take all the emotion out of asset allocations.
Some advisors and investors may be chary of these ETPs because of their relative novelty. On a market-weighted basis, the average age of these funds is just five years, but ALTY and MLTI have not yet celebrated their second anniversaries. We haven’t yet seen how these products fare over an entire economic cycle.
Of course, all ETPs were once young. Some thrived to become successful portfolio mainstays while others withered and died. Because of their inclusion in many retirement lineups, multi-asset income products seem to be on a path toward sustainability. “Sustainability is about survival,” says futurist Jamais Cascio. Time will tell if multi-asset ETPs will make market cycles more survivable for income-hungry investors.
Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of Marketing, Research and Education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.
