Despite continued predictions of rising interest rates, yields on fixed income securities remain near historic lows, leaving advisors scrambling for ways to generate income in client portfolios without taking on too much risk.

ETF sponsors such as Guggenheim, iShares, SPDR and First Trust are tapping into that need with the growing number of offerings that fall under the banner of multi-asset-income exchange-traded funds. The database lists about a dozen such ETFs, most of them launched in the last two years.

Unlike most ETFs, which focus on a single sector or asset category, the members of the multi-asset-income clan generate yields of anywhere from 3.5% to more than 6% by combining a number of asset classes such as high-dividend-paying stocks, real estate investment trusts, master limited partnerships, preferred securities and bonds. By investing in multiple asset classes with a low correlation to each other, these ETFs aim to provide income well above what investors can get from the fixed-income markets, but without betting the ranch on one type of investment.

“If a client says he needs more investment income, this is a better alternative than going into a single asset class to get 5% yield,” says William Belden, managing director of Guggenheim Investments, which offers two multi-asset-income ETFs. “It’s a means to getting a higher yield without going off the risk spectrum in fixed income or REITs.”

The notion that different income-producing asset class returns will offset each other at various points in time has proved itself over the last five years. During that time, the correlation to stocks has been 0.63 for master limited partnerships, 0.76 for real estate investment trusts and 0.56 for preferred stocks. And at a time when 10-year Treasury securities pay a bit more than 2%, yields two to three times that level look awfully attractive.

At the same time, it’s hard to predict how multiple asset ETFs would react if rates rise, since they are too young to have endured such an environment. Their expense ratios, which range from .60% to .87%, are at least twice as high as those of broad equity and many single-sector ETFs. And because bond yields are so low, many rely heavily on dividend-paying stocks to jazz up yield.

Robert Williams, principal at Sage Advisory Group, sees that as a problem. His firm, which specializes in ETF income strategies for institutions and financial advisors, says that many of these ETFs are riskier than they appear at first glance because of their stealth equity exposure. Because high-yield investments such as real estate investment trusts and master limited partnerships have some correlation to the overall market, he says, a downturn would ding them too.

Instead of using multi-asset ETFs, Williams’ firm assembles more conservative multi-asset-income ETF portfolios consisting of 70% to 80% diversified fixed income and 20% to 30% dividend-paying stocks, real estate investment trusts and master limited partnerships. At under 3%, the overall portfolio yield falls far below what multi-asset-income ETFs produce. But in the long run, he believes, taking risk down a few pegs is worth the lower yield.

“You have to weigh the desire for higher income against the likelihood of higher volatility it takes to achieve it,” he says. “Without a sizable core fixed-income component, these multi-asset-income ETFs could deliver negative surprises.” Nonetheless, he sees them as a potential alternative for income seekers who don’t want to assemble a portfolio of ETFs themselves.

Others, such as Jeffrey Walker, portfolio manager at Global Financial Private Capital, take a more favorable view. Walker uses a multi-asset ETF for portfolios that require a higher-than-average level of income and finds it useful as part of a conservative equity income allocation. “I look at it as a core diversifier that automatically rebalances and has good yield and performance,” he says. “And if I want to emphasize particular income areas, I can overweight or underweight individual equity or fixed-income sectors with other securities.”

Different Paths To Yield
A look at two of the largest multi-asset-income ETFs highlight how widely strategies can vary. At $1.3 billion in assets, eight-year-old Guggenheim Multi-Asset Income (CVY) is the oldest member of the group. It has a 0.82% expense ratio, and a 30-day SEC yield of 5.5%. Launched in 2012, First Trust Multi-Asset Diversified Income (MDIV) has $786 million in assets, a 5.81% yield, and a 0.60% expense ratio.

Based on the Zacks Multi-Asset Income Index, which consists of approximately 150 securities, the Guggenheim ETF consists of U.S.-listed common stock (55%), real estate investment trusts (9%), master limited partnerships (9%), closed-end funds (10%), American Depository Receipts (ADRs) (10%), Canadian Royalty Trusts (1%) and preferred stocks (6%).