Under The Hood: An Unheralded Multi-Asset ETF

Some ETFs hold stocks. Others focus on bonds. Still others hold real estate investment trusts or master limited partnerships. Then there is the breed of ETF that offers exposure to all those asset class. Not surprisingly, those funds are called multi-asset ETFs.

The dominant name in the multi-asset ETF arena is the Guggenheim Multi-Asset Income ETF CVY, which has over $1 billion in assets under management. However, a rival fund that has been walking softly offers income investors another attractive multi-asset option. That ETF is the Multi-Asset Diversified Income Index Fund MDIV.

A lot of folks probably do not know this, but the Multi-Asset Diversified Income Index Fund has proven to be one of the best ETFs to come to market in 2012. At least in terms of asset-gathering ability. MDIV debuted in late August and already has $325.2 million in AUM.

To be sure, MDIV delivers on the multi-asset promise as the fund's breakdown looks like this: An almost 15 percent weight to high-yield bonds, a 26.4 percent allocation to dividend stocks, a nearly 20.9 percent weight to MLPs and allocations in the area of 19 percent to preferred stocks and REITs. Regarding the junk bond allocation, almost all of it comes by way of the iShares iBoxx $ High Yield Corporate Bond Fund HYG.

HYG, the largest junk bond ETF, represents 14.8 percent of MDIV's weight. No other holding accounts for more than 1.95 percent. MDIV's second- through eighth-largest holdings are all REITs, including CYS Investments CYS and American Capital Agency AGNC. The ETF's largest MLP holding is QR Energy QRE, a small-cap MLP with a massive 11 percent yield.

Preferred stocks held by MDIV included issues from Bank of America BAC, J.P. Morgan Chase JPM, Apache APA and Goldman Sachs GS. Among tradition dividend stocks, MDIV features allocations to Altria MO, AT&T T and Diamond Offshore DO, among others.

As MDIV's impressive AUM total indicates, investors' interest in the ETF has been high despite the fact that fund can still be considered "new." Undoubtedly, that interest has been stoked by a 5.53 percent 30-day SEC yield and a year-to-date return of around nine percent. CVY, though solidly higher this year, has lagged MDIV and the former's 30-day SEC yield is slightly lower at 5.47 percent.

A common issue that keeps many investors away from new ETFs is volume, or lack thereof. Fortunately, that is not a problem with MDIV. While CVY has average daily volume for the trailing three months of over 226,600 shares, MDIV's daily turnover is north of 282,000 shares.

For the income investor that is also concerned with valuation, it is worth noting MDIV sports a price-to-earnings ratio of 13.86 and a price-to-book ratio of 1.63, according to First Trust data. By comparison the SPDR S&P 500 SPY, which has a 30-day SEC yield of less than two percent, has a P/E of 14.4 and a price-to-book of 2.3.

One potential downside to MDIV is the exposure to preferreds, which to be precise is 18.58 percent. Investors enjoy the high yields and the close to guaranteed income offered by preferreds. However, preferred issues are vulnerable in a rising interest rate environment and the reality is U.S. interest rates only have one way to go and it is not lower. On the upside, MLPs have the potential to remain durable when interest rates rise and many REITs do not carry massive debt loads. Some that do have debt issues have been refinancing at today's low rates. MLPs and REITs combine for over 40 percent of MDIV's weight.

Assuming the Federal Reserve holds rates steady for another 18 to 24 months, MDIV remains an attractive income-generating ETF. Do not forget that even if MDIV is held for 18 months and that is when the Fed raises months, the investor that did so will have collected 18 dividend payments because MDIV pays a monthly dividend.

For more on multi-asset ETFs, click here.