Revisiting A Popular Multi-Asset ETF

During the go-go days of the Federal Reserve's various versions of quantitative easing, a slew of high-yield sector and asset classes became investor favorites. That includes multi-asset exchange-traded funds, such as the First Trust Multi-Asset Diversified Income Index Fund (First Trust Exchange Traded Fd VI MDIV).

ETFs like MDIV may swing back into focus as government bond yields remain low, keeping investors on the hunt for alternative yields sources. Beyond common stocks, multi-asset ETFs can hold assets ranging from junk bonds to REITs to MLPs to preferred stocks. A lineup featuring assets like that not only helps investors generate income, but also reduces exposure to the intense correlations seen throughout equity markets.

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In addition, non-investment grade bonds are viewed as less sensitive to interest rate increases, and dividends on preferred stocks are almost a sure bet, because a company that does not pay a previously agreed to dividend on a preferred issue risks harm to its credit rating. 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.

A Closer Look At MDIV

MDIV's lineup shows the fund lives up to its multi-asset billing. The $735.4 million ETF, which turns four later this year, devotes over 21 percent of its weight to junk bonds via the actively managed First Trust Tactical High Yield ETF (First Trust Exchange-Traded Fund IV HYLS).

MDIV's underlying index “is comprised of securities classified as equities (20 percent), real estate investment trusts (REITs) (20 percent), preferred securities (20 percent), master limited partnerships (MLPs) (20 percent) and a high yield corporate debt ETF (20 percent),” according to First Trust.

“Some of the individual securities that are among the top holdings in the portfolio are as follows: CYS Investments Inc. (1.81 percent), Chimera Investment Corporation (1.50 percent), MFA Financial Inc. (1.36 percent), Two Harbors Investment Corp. (1.35 percent), and Golar LNG Partners LP (1.34 percent). Currently we see a 30-Day SEC Yield of 7.17 percent in MDIV, which likely explains at least a portion of its popularity as the largest fund in this 'Multi-Asset' space. Daily trading volume in the product is not huge, at about 192,000 shares, but thisseems normal considering the likely 'buy-and-hold' investors that the product probably attracts,” said Street One Financial Vice President Paul Weisbruch in a note out Tuesday.