Searching for yield with record low rates: multi-asset ETFs

The search for yield is a daunting one for investors in this era of near-zero interest rates.

Yes, the U.S. Federal Reserve is widely expected to raise rates later in the year. Even so, they will probably remain at historically low levels well into 2016.

Hence, the popularity of multi-asset exchange-traded funds (ETFs) since the end of the financial crisis. These funds are designed to give return-seeking investors exposure to a variety of asset classes bundled up in one package. They span everything from common and preferred stocks to high-yield products such as master limited partnerships (MLPs) and real estate investment Trusts (REITs). All this with the usual convenience and low fees many ETFs offer.

The special attractiveness to investors, particularly those nearing or in retirement, is the way these funds can balance income and growth, diversify risk and sometimes achieve lower overall price volatility than 100% stock or bond portfolios.

These are ready-made portfolios, and many time-stretched investors love them. Assets in these funds have jumped from less than $500 million in 2010 to more than $6 billion today, according to FactSet Research Systems.

That's not to say these funds don't have drawbacks. More experienced investors may be better off making their own choices among specialty quality funds. A fund house or bank managing a multi-asset ETF may not have the same level of in-house expertise in every asset class.

Aside from gleaning details on the fee structure of these investments, make sure you carefully read the ETF's fact sheets to understand the particular holdings and investment goals.

For one thing, the asset allocation strategies of these funds can vary widely. There are multi-asset funds that cater to conservative investors as well as more aggressive types who don't mind volatility if it means higher potential returns. Some are mind-bendingly complex and use leverage. So make sure you know exactly what you're getting into.

There also may be different tax rules for multi-asset ETFs that invest a majority of their funds in domestic equities versus those more heavily-weighted toward fixed-income investments. Best to check with a tax expert before sinking serious money into these ETFs.

Also, be mindful of the difference between multi-asset funds that invest directly in shares or bonds -- and "multi-manager" or "fund of funds" products that buy units in other funds. You will tend to pay higher fees for the latter.

The granddaddy of multi-asset ETFs is the Guggenheim Multi-Asset Income (CVY) that launched in 2006. Its portfolio includes common stocks, REITs, closed-end funds, MLPs, preferred stocks and Canadian royalty trusts.

For investors looking for income in challenging times of low interest rates there are some options that are currently offering dividend yields of more than 5%.

One is the First Trust NASDAQ Multi-Asset Diversified Income Index Fund (MDIV). It's composed of domestic and international dividend-paying stocks, REITs, oil and gas or basic materials MLPs, U.S.-listed preferred securities and an index-based ETF that invests in high yield or "junk" bonds.

Other income-generating products include the Arrow Dow Jones Global Yield ETF (GYLD) and the YieldShares High Income ETF (YYY).

So if you are hungry for yield and seeking diversification protection against changing market conditions, multi-asset ETFs may be worth a serious look for your portfolio.

Sanjoy Ghosh is Chief Investment Officer at Covestor (Covestor.com), an online investing marketplace.