Beware Blindly Reaching For Alluring Yield

June 02, 2015

This article is part of a regular series on thought leadership from some of the more influential ETF strategists in the money management industry. Today’s article is by Andrew Gogerty, vice president of investment strategies at Boston-based Newfound Research LLC.

 

ETFs offer investors the ability to access a variety of income-producing asset classes for their portfolios. But income is only one component of income-focused ETFs.

 

These ETFs are still subject to daily market movements of their portfolio holdings, so capital appreciation—or depreciation—is often a material component of total return. Volatility is usually talked about with equities, but still has a material impact on fixed income. Volatility of income—the dollars of income coming in—is important, but so is preservation of the capital account base that generates that income.

 

This year, for example, popular income-producing categories such as bank loans, master limited partnerships and high-yield bonds have taken investors on a relatively wild ride in terms of yield and total return volatility. But has this volatile ride diminished investor demand?

 

For a snapshot of the space, we look at the investment universe of Newfound’s Multi-Asset Income strategy. Below is the strategy’s universe of 16 income-generating ETFs. We first scaled this universe’s assets to see if the relative rankings have changed over the past three quarters. 

 

  RELATIVE ASSET SIZE RETURNS
FUND
TICKER
Q3 2014
Q4 2014
Q1 2015
Q4 2014
Q1 2015
Vanguard High Dividend Yield ETF
VYM
8.6%
9.0%
8.7%
4.37
0.01
iShares International Select Dividend
IDV
4.1%
3.6%
3.5%
-4.61
0.49
SPDR Barclays International Trs Bd ETF
BWX
2.1%
1.6%
1.3%
-2.64
-3.99
iShares iBoxx $ High Yield Corporate Bd
HYG
11.7%
12.3%
13.3%
-0.83
1.97
iShares iBoxx $ Invst Grade Crp Bond
LQD
16.4%
16.5%
17.8%
2.14
2.48
iShares 20+ Year Treasury Bond
TLT
3.8%
5.4%
5.2%
9.31
4.21
JPMorgan Alerian MLP ETN
AMJ
6.3%
4.9%
4.2%
-12.42
-5.62
PowerShares Senior Loan ETF
BKLN
6.1%
4.9%
4.3%
-0.02
1.18
SPDR Barclays Convertible Secs ETF
CWB
2.8%
2.4%
2.2%
-0.21
2.2
Market Vectors EM Local Currency Bd ETF
EMLC
0.8%
0.9%
0.8%
-5.48
-4.12
PowerShares Emerging Markets Sov Dbt ETF
PCY
2.2%
2.1%
1.9%
0.09
2.16
iShares US Preferred Stock
PFF
9.8%
10.0%
10.4%
2.2
2.61
iShares Mortgage Real Estate Capped
REM
1.1%
1.0%
0.9%
4.35
2.39
Vanguard REIT ETF
VNQ
21.7%
23.2%
22.9%
14.25
4.72
Vanguard Global ex-US Real Estate ETF
VNQI
2.0%
1.8%
2.2%
0.77
5.18
PowerShares S&P 500 BuyWrite ETF
PBP
0.4%
0.3%
0.3%
-0.89
1.46

 

 

There was little movement in pure asset rankings. Two interesting observations are that, firstly, the high-yield sector actually increased in relative weight despite its total return loss in the fourth quarter and, secondly, that domestic real estate did not take an even bigger lead in relative assets given its outsized total returns.

 

As we’ve noted in past commentaries, asset totals are only one perspective. We can look at relative flows into the broad buckets of ETFs as a reasonable proxy of investor demand. The remaining piece—market performance—solves the puzzle of getting from point A to point B of investor assets.

 

To simplify, we look at the ratio of a segment’s relative net flows in each quarter to its starting relative asset allocation. So, for example, if the Vanguard High Dividend Yield ETF (VYM | A-96) is 8.6 percent of assets as of September 2014, its net flows in Q4 2014 would have to have been 8.6 percent of all net flows to have a 1.0x relative flow ratio (segment net flow %/starting segment asset %). 

 

FUND
TICKER
Q4 2014
Q1 2015
Vanguard High Dividend Yield ETF
VYM
1.3x .8x
iShares International Select Dividend
IDV
.1x 1.2x
SPDR Barclays International Trs Bd ETF
BWX
-1.2x -1.x
iShares iBoxx $ High Yield Corporate Bd
HYG
2.2x 2.3x
iShares iBoxx $ Invst Grade Crp Bond
LQD
1.2x 2.2x
iShares 20+ Year Treasury Bond
TLT
5.6x -.015x
JPMorgan Alerian MLP ETN
AMJ
-.2x .x
PowerShares Senior Loan ETF
BKLN
-1.2x -.8x
SPDR Barclays Convertible Secs ETF
CWB
.3x -.5x
Market Vectors EM Local Currency Bd ETF
EMLC
3.4x .6x
PowerShares Emerging Markets Sov Dbt ETF
PCY
.5x .1x
iShares US Preferred Stock
PFF
1.5x 1.6x
iShares Mortgage Real Estate Capped
REM
.1x -.2x
Vanguard REIT ETF
VNQ
.6x .4x
Vanguard Global ex-US Real Estate ETF
VNQI
.3x 3.6x
PowerShares S&P 500 BuyWrite ETF
PBP
.5x .3x

 

Some context to the numbers here is important ...

 

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