What fuels the sky-high dividends on the most popular multi-asset ETPs? Our alternatives editor looks under the hood to measure their components, risk and volatility.
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.
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