For investors, finding good sources of income has been challenging to say the least over the last decade or so. The Great Recession reset interest rates ‘lower for longer.’ And that meant traditional sources of income—like CDs or treasury bonds—were paying next to nothing. Investors had to search elsewhere for their yield. This gave birth to the so-called multi-asset income portfolio method.
But given the complexities of the global economic world, regular people might find balancing a variety of income-producing asset classes a tough nut to crack.
This is where active ETFs can shine. Thanks to their low costs and active approach, active ETFs can provide one-ticker access and allow investors to navigate the waters with ease.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
A Quick Multi-Asset Primer
The modern portfolio is built on the fact that owning a multitude of asset classes—stocks, bonds, commodities, etc.—helps to reduce volatility and boost long-term returns. When one asset class is suffering, another will lead and pick up the slack. The combination is what works. The same could be said among asset classes themselves. Growth stocks don’t necessarily perform like value stocks. Nowhere is that more evident than in fixed income.
This is especially true given the shifting global macro-environment. One minute, interest rates are lower, and in another the Fed is raising rates. Changes in economic activity can make it harder for some firms to repay their bonds, while a surging stock market can affect the fortunes of convertibles and other fixed-income assets.
To this end, multi-asset income has become the portfolio tool du jour for those looking for a high and sustainable yield from their portfolios. Here, investors cobble together a variety of bonds, dividend-paying stocks, infrastructure assets, and high-yielding securities—like REITs and MLPs—to deliver a non-correlated asset experience to drive dividends and other income.
For example, investors may own a base of treasuries, a floating rate fund, convertible bonds, a dividend stock-focused ETF, and a REIT ETF to gain a blended higher yield that provides a smoother ride for their portfolio.
Active Approach
The growth of ETFs has allowed multi-asset income to explode in popularity. Quickly, investors can add asset classes with one-ticker access. The problem is investors are often doing it alone and multi-asset income is not necessarily a static approach to portfolio management. We can clearly see that today. The shifting Fed/interest rate environment has made safe Treasury bonds a losing proposition. The end result is investors need to pay attention to this sleeve of their portfolio more than ever.
But active management can help on this front.
Because active managers aren’t tied to a static benchmark or index, they can shift their allocations and holdings with ease. They can take advantage of yields from the entire spectrum of asset classes, hunt for bargains, and look for total return opportunities within multi-asset income. They can do so on the fly. And there’s plenty of evidence that suggests active management can play a huge role in boosting returns in the fixed-income sector.
The growth of active ETFs has only strengthened active management’s appeal with regard to multi-asset income.
For starters, costs tend to be lower for ETFs than mutual funds or separately managed accounts. Those lower expense ratios translate into higher yields and better returns for investors. Given that income investing is a game of inches, any extra yield is welcome. Second, active ETFs benefit from lower taxes. Because of the creation-redemption mechanism within ETFs, active ETFs are able to skirt capital gains taxes as they shift their portfolios around. This is a critical win over doing it yourself and selling a single ETF tied to an asset class. You’re still on the hook for those taxes.
Finally, investors can regain the ‘set-it & forget it’ mantra with active multi-asset income ETFs. Because they hold a variety of asset classes in one ticker, investors can easily create a static portfolio allocation to the theme, buy the ETF, and then walk away. They know that X% of their portfolio is dedicated to income and they don’t have to think about how that income is being generated.
Don’t forget to explore our Dividend Guide where you can access all the relevant content and tools available on Dividend.com based on your unique requirements.
Taking the Multi-Asset Income Approach
Given the benefits of a multi-asset approach to income investing and using active management to get those benefits, investors may want to shift some of their portfolio in this direction. With the active ETFs still in their infancy, the number of funds taking this approach is small but growing. For example, both the First Trust TCW Opportunistic Fixed Income ETF (FXID ) and SPDR DoubleLine Total Return Tactical ETF (TOTL ) own a variety of shifting bond/fixed-income securities designed to enhance yield and returns. There are numerous funds that tackle the equity income side of this equation.
As for complete one-ticker access, the First Trust High Income Strategic Focus ETF (HISF ) holds a variety of bonds, equity, and other asset classes to generate a high-income experience for portfolios.
However, given the need for a multi-asset approach and increasing investor demand, there are plenty of new funds in the registration stages to tackle the approach. And they should be welcomed by investors with open arms. In the end, active ETFs can offer a lot to investors when they search for income solutions.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.