Diversification Simplified: Multi-Asset Income Funds

multi-asset income fundsPrevious posts here have looked at different equity investment asset classes that can contribute significantly to your investment income.  The trick, of course, is to select and manage these investments properly so as to maximize their benefits.  Doing this for a collection of dividend-paying stocks, REITs, MLPs, preferred stocks, convertibles, etc. can be quite an ongoing chore.  If you are looking for the income diversity that these various asset types can provide without the headache of actively managing them yourself, it may be time to consider buying shares in a multi-asset income fund.

Wide Range of Income Investments

As the name implies, multi-asset income funds typically contain a wide range of different types of income investments.  They are available as both ETFs and mutual funds and have yields ranging from 3% to 6%.  Since the funds have widely differing investment styles and goals, it is important to understand what type of fund you are buying.  Some funds contain bonds (high-yield, emerging market, convertible) and others do not.  Some avoid certain asset classes like MLPs or preferred stock.  Fund managers are typically given a great deal of latitude to adjust their portfolio allocations based on economic conditions and forecasts.  According to Lipper, about 100 new income-oriented funds using multiple assets have become available since 2010.

Pros and Cons

Some advantages of owning these funds are that they provide higher yields than bonds, but also have the possibility of capital appreciation even as interest rates rise.  A diversified approach also helps avoid overweighting any single type of asset.  With a fund, you do not need to worry about having to periodically rebalance the allocation among asset classes that you normally would if you owned these asset classes separately.

One disadvantage to these funds is that their prices can experience high volatility during short periods of high market stress as they often hold riskier, rate-sensitive investments.  Another disadvantage is that many of the funds that are organized as mutual funds incur high upfront costs.

Smart Investment Moves

If you think you might be interested in these investments, I would suggest that you favor the ETFs over the mutual funds.  I also think these investments are better suited for those who have a long-term timeframe (over five years).  I certainly would not make these funds the primary investment vehicle for my income portfolio, but would treat them as complimentary to traditional bond and equity income investments, providing further diversification.

Here are a couple of ETFs to consider:

Guggenheim Multi-Asset Income ETF (CVY, yield 4.72%, expenses 0.75%)
First Trust Multi-Asset Diversified Income Index Fund (MDIV, yield 5.68%, expenses 0.68%)

If you’re willing to pay an upfront load, consider this mutual fund:

Franklin Income A (FKINX, yield 4.79%, expenses 0.62%)


(Disclosure:  I do not currently own any of the investments mentioned above, but may purchase them in the future.  Yields mentioned are current as of July 11, 2014.  I am not recommending the investments discussed above for purchase, but only that they may be potential candidates for your own research.  Please read the prospectuses for any investments prior to making your own investments.)