For those nearing retirement, figuring out how to transition from accumulating investments to spending that money is a major concern. Income is the name of game. But with interest rates currently in the basement, investors have had to broaden their horizons to new assets classes in order to find yield.
Everything from pipeline master limited partnerships (MLPs) to high-yielding dividend stock funds – like the iShares Select Dividend (DVY) – have now become portfolio staples for investors looking for yields beyond 2%.
Accordingly, building an income plan has become a complex operation, but it doesn’t have to be. A proliferation of exchange traded funds (ETFs) help take the guess work out building income and adding these non-traditional sources of yield. For investors, the multi-asset income funds could be a godsend.
Improving On the “Balanced Fund”
Balanced funds – which blend both stocks and bonds together in one portfolio – have received a face-lift. Wall Street has come to the rescue with a variety of new products designed to make managing income in retirement easier. These new multi-asset plays, include weightings to everything from junk bonds, emerging market equity and preferred stocks, to real estate and pipeline partnerships. These new funds can be an easy way to achieve diversified income exposure and meet a need for higher and more stable income.
The basic idea is that most income investors already have plenty of exposure to traditional income products – Treasury bonds or utility stocks, such as Duke Energy Corp. (DUK), for example. But by incorporating one of these new ETFs into their portfolio, investors gain a higher yield – usually around 5% – long-term capital appreciation potential, as well as broad diversification with lower volatility. At the same time, these multi-asset income plays remove some of the complex tax issues associated with holding some alternative asset classes like MLPs. Most of these funds produce a standard 1099-div form come tax time.
A Few Prime Multi-Asset Picks
While the fund category is still relatively new, there has been an impressive amount of launch activity. Investors do have plenty of choices to add these funds to portfolios.
Launched back in 2006, the Guggenheim Multi-Asset Income (CVY) is the oldest in the category. CVY features a portfolio constructed of common stocks, REITs, closed-end funds, MLPs, preferred stocks and Canadian royalty trusts. Overall, the ETF spreads its $1.2 billion in assets among 150 different holdings. That widespread focus helps CVY produce a 5% dividend yield and a five year annual return of 25%. Expenses for CVY run 0.89%. Guggenheim also offers an international version, with its International Multi-Asset Income ETF (HGI). HGI follows a similar strategy with international stocks and bonds. Ay 3.68%, HGI’s yield is lower.
BlackRock Inc. (BLK) offers the iShares Morningstar Multi-Asset Income ETF (IYLD). IYLD uses a fund of funds approach and invests in other iShares ETFs. Currently, the ETF’s portfolio is tilted towards bonds (60% of assets), with stocks (20%) and alternative income sources (20%) rounding out the holdings. That focus on bonds did make it underperform last year, but does help it generate a 6% yield. For those looking for a bond-only multi-asset ETF, there's the new iShares Yield Optimized Bond (BYLD).
Also offering a high yield (5.89%) is the First Trust Multi-Asset Diversified Income (MDIV). The $600 million fund spreads its bets among 119 different holdings running the gamut of high-yielding asset classes. Top holdings for MDIV include mortgage REIT Annaly Capital management Inc. (NLY) and E&P firm QR Energy LP (QRE). Performance for MDIV has been pretty good as well, with the ETF managing to return 10.98% since its inception in 2012.
Finally, for those investors strictly looking for yield, both the YieldShares High Income ETF (YYY) and Arrow Dow Jones Global Yield ETF (GYLD) each pay 6%-plus. It should be noted that their portfolios are a bit riskier, however.
The Bottom Line
For investors in or nearing retirement, managing an income portfolio can be tricky – especially since low interest rates have pushed investors into new, higher-yielding asset classes. Luckily, there’s a way to get exposure to these alternatives in one ticker.