New Multi-Asset Income ETFs
May 11, 2012
The quest for yield has inspired three new multi-asset income funds in as many weeks.
That roughly doubles the number of ETF offerings in the multi-asset income space.
The driving idea is simple: If you need income, why immediately constrain yourself to just dividends from stocks or coupons from bonds right off the bat?
Instead, consider the broad range of assets that spin off cash flows. Then you can decide what’s appropriate given your risk preferences, your level of comfort with less common asset types, and how these funds might look with the rest of your portfolio.
The new funds are the Arrow Dow Jones Global Yield (NYSEArca: GYLD), the actively managed SPDR SSgA Income Allocation (NYSEArca: INKM) and the iShares Morningstar Multi-Asset Income (BATS: IYLD).
Comparing the different asset types across the funds isn’t easy.
I took a stab at creating a level playing field by assigning all the assets involved into common buckets. Two caveats apply. First: Holdings may change—especially for actively managed INKM. Second: I used index constituents for GYLD since fund holdings were not available initially. (Holdings were posted 5/11.)
That said, the funds’ current mixes show some real differences.
Arrow’s GYLD and SSgA’s INKM share similar debt allocations (about 40 percent), but GYLD holds far fewer equities, instead reaching for large helpings of real estate (including REITs) and master limited partnerships (MLPs). REITs and MLPs are pass-through structures that spin off income by design.
iShares’ ILYD meanwhile strongly favors debt in its portfolio (61 percent), rounded out with equities (19 percent) and a good chunk of preferred stocks (15 percent). Preferred stocks act more like bonds given their fixed cash flows and corresponding interest rate risk.
These pie charts provide the broad contours of each of the funds’ exposure. The table below shows a parsing of assets that’s one notch finer.
Immediately we see differences in the roughly 40 percent allocation to debt made by GYLD and INKM: GYLD strongly favors high-yield instruments (34 percent), while INKM goes for investment grade (30 percent).
IYLD’s large debt exposure of more than 60 percent straddles the range more evenly, with 31 percent to investment grade, 20 percent to high yield and 10 percent to a mixture of the two.
On the equity side, GYLD’s exposure stands out for largely ignoring U.S. equities in favor of developed markets beyond our shores.
In contrast, INKM’s large and balanced equity exposure has U.S. holdings first and foremost at 20 percent, with a good chunk of global stocks at 13 percent and developed ex-U.S. at 8 percent.
IYLD’s equity mix is dominated by U.S. exposure at 15 percent, with little from the emerging markets. Both GYLD and INKM meanwhile share a roughly 5 percent allocation to pure emerging equities.
All three funds carry some degree of currency risk, whether from their equity positions, locally denominated foreign debt or global real estate.
And The Winner Is?
So which basket is best? With no performance history, we can’t look at realized yield.
But for me, GYLD seems like the risk-taker of the bunch, with large positions in high-yield debt, non-U.S. equity and alternative asset types. I’d expect this fund to have higher yield, with commensurately higher risk to capital.
IYLD and INKM look more conservative to me than GYLD, with IYLD carrying a broad range of credit risk in its large bond allocation, and INKM dialing back both credit and interest-rate risk by virtue of its smaller, high-rated fixed-income basket.
Beyond their differences in exposure, the funds vary in other ways, too.
IYLD stands out for the cheapest expense ratio at 0.60 percent, with GYLD and INKM charging 0.75 percent and 0.70, percent respectively. While these fees don’t seem crazy-high to me given the breadth of the portfolios, the multi-asset approach costs more than a vanilla U.S. dividend fund, and this difference must play a role in the decision process.
INKM has two distinctions here. First, it doesn’t track an index, unlike most ETFs; and second, it distributes its income quarterly, not monthly. This second point may be a deal-breaker for some investors who really live off the cash flows from their portfolios.
IYLD and INKM share a common framework: Both are funds-of-funds. Each ETF gets exposure from other ETFs in its basket. This structure makes a top-level holdings review of each fund easier than wading into the 150 securities in GYLD’s basket.
The downside is a loss of impartiality: SSgA’s INKM fund holds only SSgA ETFs, and BlackRock’s IYLD holds only BlackRock funds.
Speaking of sponsors, know that GYLD’s is brand new: ArrowShares.
While big financial institutions may not be hugely popular these days, personally, I take a small measure of comfort in a fund issued by a well-established sponsor like SSgA or BlackRock.
Lastly, use caution trading any of these fledgling funds: Even a large issuer can’t create liquidity at will. Trade with limit orders set close to intraday fair value. Trading earlier in the day might be preferable given the global exposure these funds have.