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How To Diversify Your Income Streams With A Single ETF

Whenever I look out across the investing landscape for my clients, I always seek to deliver a combination of high yield and low volatility. Today's income investors are seeking the right mix of assets to generate the dividends they need to survive while also being able to sleep at night knowing that their nest egg isn't susceptible to wild price fluctuations.

So how do you generate these returns in a world of sub 2% 10-Year Treasury Bonds and an S&P 500 dividend yield of just 2.45%?

The answer is simple: Selecting funds with a mix of high quality and high yield components that work in harmony to generate outstanding total return.

This new breed of multi-asset ETFs comprise a mix of stocks, bonds, and alternative assets that work together to produce a steady income stream and capital appreciation with smaller price fluctuations. Some of my favorite ETFs in this space and their current 30-day SEC yields include:

iShares Multi-Asset Income Fund (IYLD) 5.37%

PowerShares CEF Income Composite (PCEF) 7.39%

Guggenheim Multi-Asset Income (CVY) 5.48%

SPDR SSgA Income Allocation ETF (INKM) 3.99%

When you look at the chart of IYLD above you can see that its largest correction in the last year was a tepid 2%. This is because during periods of volatility, the Treasury bonds and high quality holdings offset the higher yielding mortgage REITs, preferred stocks, and dividend paying equities.

In just the 12 short months that this fund has been available to investors it has returned a healthy +11.72%. That type of steady price appreciation and low volatility is what is so appealing to investors that are looking to maintain their spending power without adding too much risk.

High Yield Pitfalls

Over that last several years I have seen many income investors fall into the trap of being over-allocated to one asset class such as: dividend equities, high yield bonds, preferred stocks, closed-end funds, master limited partnerships, and mortgage REITs. While these investments can have excellent short term gains and sky-high dividends, they have also proven to be susceptible to periods of extreme price corrections.

Take the iShares Mortgage REIT Capped ETF (REM) for instance. This fund is made up of approximately 30 residential and commercial real estate investment trusts. It's current SEC yield is 11.65% and its one-year performance has produced an astounding +21.90% total return.

But when you look at the chart of REM below you can see that the ride has not been without some bumps in the road. In just a short six-week period from October 2012 to mid-November 2012 this fund lost 14%. For investors with reasonable stop losses in place, they most likely got stopped out near the low, just in time to watch it snap back and rally to new highs.

A high yield fund like REM may make sense for a small portion of your portfolio, but if you are heavily allocated to this high volatility fund I would be cautious about the future given its lofty rise. Instead consider adding a multi-asset or low volatility fund to your portfolio and always remember that High Yield = High Risk.

Additional disclosure: David Fabian, Fabian Capital Management, and/or its clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.

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Comment   |  6 years, 7 months ago from Irvine, CA