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Seeking yield? Don’t put all your eggs in one (income) basket

edited June 2020 in Fund Discussions
https://www.blackrockblog.com/2020/06/17/seeking-yield-dont-put-all-your-eggs-in-one-income-basket/

Seeking yield? Don’t put all your eggs in one (income) basket
Karen Schenone, CFA

Looking to generate income from your nest egg? Make sure you don’t get it all from just one basket. Karen explains two funds designed to provide income that aren’t over reliant on any one source.

The diversified approach of BYLD and IYLD has offered a middle ground of yield and risk versus traditional asset classes


Income is an important aspect to many portfolios and often the top priority when it comes to investing. Although we may be in a low yield environment today, opportunities for potential income continue to exist both in bonds and broader asset classes. Constructing the optimal portfolio while weighing risk and return is difficult. Accessible and adaptable ETFs like the iShares income optimized BYLD and IYLD may be a g

Comments

  • edited June 2020
    Hi guys. I agree with Ms. Schenone about not putting all of ones eggs in one basket.

    An interesting fund that makes up about 9% of my hybrid income sleeve is AZNAX. This fund has a distribution yield of 7.7% and disburses 7 cents per share per month. To do this, it is very active in the market with its positioning as it has a 66% turnover ratio. Part of the distribution comes from capital gains and the other parts from dividend and interest income. And, at times, it has also returned some principal. I have been an owner of this fund for better than five years and so far through the years that I have owned it I am net positive on my principal investment plus what it has paid out to my pocket.

    For me, it has been a good income generator. If it were not already at a full allocation within its sleeve I'd buy more of it during stock market downdrafts.

    This is also a fund that @Scott, who use to post on the board a few years back, touted.

    In checking Scott's MFO handle he was last active in December of 2016.

    Old_Skeet



  • I regard this Blackrock page about two of its funds as a sales blurb. Still worth keeping posted here as it can serve as a starting point on how to examine these pitches and how to examine numbers.

    It says that IYLD "maximize[s] yield per unit of risk." We can see from the graph that this isn't true. image

    IYLD is represented by the pink Multi-Asset High Income Index dot: 3% yield and 12.5% std dev, for a yield/std dev (risk) ratio of 0.24. The US Dividend Stocks alone, with its 4.5% yield and 18% std dev has a higher yield per unit risk of 0.25.

    Let's say you don't like that level of risk. We know that leverage can be used to dial up or dial down risk. If you want to cut risk by half, deleverage by half - put half into cash and leave half in your original investment.

    Here, let's say we want to dial back the risk to the same 12.5% as IYLD. So we leave 12.5/18, i.e. 70% in div stocks. We'll put the rest into a no penalty CD (for complete liquidity and zero volatility) yielding 1%+. That gets us the same "risk" (read volatility) as IYLD and a yield of 70% x 4.5% + 30% x 1% = 3.15% + 0.3% = 3.45%. A much better yield, and a much simpler investment.

    Of course I've ignored the fact that what I've constructed is primarily an equity portfolio except to the extent that I've calculated "risk". Which highlights two things: 1) Blackrock has likewise ignored any concerns about equity other than standard deviation, and 2) if this omission bothers you then you intuitively feel there's more to risk than standard deviation.

    The picture on the bond side (YLD) is simpler. If you draw a straight line between the orange Aggregate Bond dot and the orange High Yield Bond dot, you'll see it passes a bit to the left (lower risk) of the YLD index. As it turns out, standard deviation doesn't follow a straight line when blending two investments. Blending (think diversification) reduces risk. So the true line representing a blend is not just barely to the left (lower risk) of YLD, but a bit more.

    Again, no need to complicate matters with a plethora of different bond types of asset classes. Especially if you have to pay a management company to make the portfolio look impressive.

    A bit more about volatility: These portfolios are constructed based on average correlations between the asset classes. As market risk increases, there is a tendency for these correlations to increase and consequently the overall portfolio volatility to increase. Something that's expected but not represented in the "risk" figures shown.

    I would prefer a vehicle that monitored correlations and adjusted ratios accordingly. That's the exact opposite of what's described here: maintaining fixed targets regardless of market conditions.
  • edited June 2020
    msf said:

    I regard this Blackrock page about two of its funds as a sales blurb. Still worth keeping posted here as it can serve as a starting point on how to examine these pitches and how to examine numbers.

    I wasn’t going to read this just based on the blurb JohnN posted. Sounded terribly elementary. But after looking at msf’s excellent comments, I decided to read / skim it. There’s a lot of good sense in it. I suppose anything an investment house (including TRP) puts out has “sales pitch” in there somewhere - but largely the writer is on-target. The asset breakdown for that income focused ETF certainly qualifies as “diversified” - if nothing else. Reminds me somewhat of RPSIX (when all the funds it holds are broken down).

    “The iShares Morningstar Multi-Asset Income ETF (IYLD) is designed to do just that. IYLD seeks to track the Morningstar® Multi-Asset High Income Index which seeks to optimize a combination of iShares ETFs to maximize yield per unit of risk. The index rebalances back to a 60% fixed income, 20% equity and 20% alternative allocation on a quarterly basis.”

    Pick your own poison, but I find myself slowly tilting in the direction of equities, hedge-like instruments and hard assets and seeking to “escape” most types of bonds in any concentration. As a retired senior, I can’t exit bonds completely - but it’s a tough call whether I dislike bonds or equities more at this moment.

    Nice visuals in article. I always loved color-coded pie charts. I guess the ones here are better termed donut charts. But I like them nonetheless.
  • Because most of my money is in deferred accounts, seeking yield does not have much attraction for me. So, nice diversity I guess but I wouldn't be interested in this kind of fund. The charts are nice, but this post seemed more like a sales pitch to me.

  • IYLD ytd return has been dismal as well.
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