3 Reasons Why This Is a Great Income ETF

Income investing is a challenge in this current low yield environment. While it is true that interest rates have recently started to inch upward, that hasn't helped the desire for earning that extra bit of current income, particularly among income-seeking investors.

In light of this, I would like to highlight the Guggenheim Multi-Asset Income ETF (NYSEMKT: CVY  ) a high yielding income ETF, which in particular stands out tall among the rest.

The ETF not only tracks the performance of the high dividend yielding equities but also, depository receipts, MLPs, REITs as well as closed-ended funds that have a track record of paying high dividends as represented by the Zacks Multi Asset Income Index. It has an expense ratio of 77 basis points.

Below are three reasons that support my argument of CVY being a great income ETF.

Fully justifies its investment objective
The Guggenheim Multi-Asset Income ETF primarily seeks to generate high levels of current income for investors. And the ETF has been pretty successful in doing that.

Consider the following two charts, which compare the performance of CVY with two other ETFs over five years. Representing the sentiments of the broader markets is the ultra-popular SPDR S&P 500 ETF (NYSEMKT: SPY  ) whereas the Vanguard High Dividend Yield ETF (NYSEMKT: VYM  ) represents another very different income ETF compared to CVY, as it primarily tracks the performance of dividend paying equities..

The first chart shows the comparative performance of the ETFs including dividends while the second chart excludes the dividend component and highlights only the capital appreciation.

Chart 1: Including Current Income (Total Returns)

Chart 2: Excluding Current Income

CVY has almost crushed the other two ETF in terms of total returns. However, it is seen lagging behind when we exclude the dividends component.

From a total-return point of view, CVY has returned 67.41% in this five-year time frame while it has only managed to add 23.68% without taking dividends into account. Twisting around the numbers a bit we find that 64.87% of its total returns can be attributed to dividends and current income! This is truly a remarkable achievement, especially for an investment avenue that seeks to provide high levels of income for its investors.

Performing the same exercise for the other two ETFs we find that around 26.31% and 38.70% of the total returns can be attributable to dividends for SPY and VYM, respectively. This tells us just how important the dividend component is for CVY.

An opportunity to generate alpha
Outperforming the broader market is an attribute typically not associated with most traditional income ETFs since they primarily seek to provide steady cash flow streams without worrying too much about outperforming the market. But CVY proves this thesis wrong as we have already seen that the ETF has outperformed the broader equity market over the five-year time frame.

This is an extremely vital consideration for the otherwise conservative income investor as this not only gives them an opportunity to earn similar returns as the broader markets but also enjoy higher income levels in an era of low yields.

Extra income without extra risk
Income investing and high risk tolerance is a match not made in heaven! It is therefore prudent for income investors to examine the risk profile of any income-yielding source as higher yields in exchange for higher risk is most likely an unacceptable trade-off.

However, CVY has a risk profile that is similar to the broader markets. This means that unlike other high-yielding sources it does not demand a higher risk tolerance from investors.

The above chart shows the historical volatility of the three ETFs constructed using the 30-day rolling standard deviation. We can see that apart from the spike in volatility during the 2009 mortgage crisis, all three ETFs have had fairly low volatility.

However, most importantly we see that the volatility line for CVY is almost in synchronization with that of the other two ETFs, indicating that CVY does in fact generate those extra yields without the extra volatility.

The bottom line
With the Federal Reserve holding off tapering its quantitative easing program in its latest policy meeting, it seems that interest rates will continue to remain low for some more time. In this scenario income investing will surely continue to be a challenging act as it has been for so many months. However, for the yield-seeking investors, CVY seems like a good bet going forward.

Speaking of dividends
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9/18/2014 3:59 PM
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