IYLD: Balanced Bond And Equity ETF – 5.5% Yield – Diversified Holdings (BATS:IYLD)


The iShares Morningstar Multi-Asset Income ETF (IYLD) is an ETF investing in a portfolio of high-yield fixed income, equity, and alternative income index funds. IYLD’s investment strategy, diversified holdings, and comparatively strong 5.5% yield are particularly appropriate for more conservative or risk-averse investors and retirees. Investors who take a more hands-on approach to their investments, which I believe includes many, perhaps most, of Seeking Alpha’s readers, might do better with their own diversified portfolio, in which IYLD could play a small diversification role.

Fund Basics

  • Sponsor: BlackRock
  • Dividend Yield: 5.5%
  • Expense Ratio: 0.6%
  • Total Returns CAGR (Inception): 3.9%

Fund Overview

IYLD is an ETF investing in a portfolio of BlackRock fixed income, equity, and alternative income index funds. More specifically, IYLD invests in the following types of funds:

(Source: IYLD Index Methodology)

Asset class weights are as follows:

  • Equity: 20%
  • Fixed Income: 60%
  • Alternative: 20%

Portfolio weights for the different funds themselves are calculated using a mean variance optimization equation, which maximizes yields and (expected) returns while minimizing volatility. Interested readers can take a closer look at these calculations and the index methodology here, although these processes are quite common and reliable, if a bit of a black box.

IYLD’s holdings are as follows:

(Source: IYLD Factsheet)

IYLD’s holdings provide investors with almost all the asset class and international diversification that they need, with the fund investing in a wide assortment of funds, industries, and asset classes. The fund only lacks U.S. equity exposure, a significant oversight, due to the low yield of these securities and funds.

The fund focuses on U.S. fixed income index funds, including the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). These funds are particularly appropriate for retirees, due to their strong dividend yields and comparatively low level of risk and volatility, although the lack of capital gains might be off-putting for more bullish or aggressive investors. Expect fund returns to more or less track the returns of high-yield bonds, as they have since inception:

ChartData by YCharts

IYLD invests quite heavily in long-term treasuries too, with these comprising about 30% of the fund’s holdings. I’m a bit more apprehensive about treasuries. Although they are effectively the lowest-risk assets in the world, they also yield next to nothing, and could post sizable losses if/when interest rates rise. These are all significant issues, but probably not all that relevant for the next year or two, as rates are expected to remain near zero.

For equity, IYLD focuses on international high dividend yield funds, including the iShares International Select Dividend ETF (IDV). International equities are currently looking undervalued and offer investors comparatively strong yields, so focusing on these should lead to stronger capital gains and dividends for shareholders:

ChartData by YCharts

For alternatives, the fund focuses on U.S. real estate and preferreds index funds.

IYLD only invests in funds with comparatively strong dividend yields, so its resultant 5.5% yield is quite a bit higher than those of other asset classes:

ChartData by YCharts

In general terms, I believe that IYLD’s investment strategy and holdings are perfect retirees, and for the average CEF/ETF Income Laboratory subscriber. IYLD is particularly appropriate for more conservative investors, due to the fund’s index methodology, focus on low-risk assets including treasuries, and diversified holdings.

Now, before taking a look at the fund’s performance, I wanted to do a quick high-level analysis/comparison of IYLD, which should prove instructive. By investing in IYLD, you are tasking BlackRock with choosing the best fixed income funds for you (and equity, real estate, preferreds too, but let’s focus on fixed income). BlackRock chose HYG. I chose BHK, ANGL and FALN, as you can see in some of my previous articles. IYLD has underperformed these past few months:

ChartData by YCharts

IYLD does yield a bit more than its peers, but the difference is quite small:

ChartData by YCharts

At the CEF/ETF Income Laboratory, we have other model portfolios, some of which include the funds mentioned above, which have also outperformed relative to IYLD.

In my opinion, index funds are great and a diversified portfolio of these created by an asset manager like BlackRock is even better, but the best returns and yields go to investors who more aggressively select and invest in their own portfolio of funds. This is obviously a higher-risk strategy, so more conservative investors might prefer IYLD, but also one that should lead to stronger returns, as can be seen above, and as we shall soon see.

Performance Analysis and Peer Comparison

IYLD’s index methodology, holdings, and yield are quite good, but the fund’s focus on international equities and lack of U.S. equity investments have caused it to underperform these past few years. Several of its closest peers, including the Vanguard Target Retirement Funds and the Strategy Shares NASDAQ 7 HANDL Index ETF (HNDL), are also targeted towards retirees, invest in a diversified portfolio of index funds, and have outperformed IYLD:

ChartData by YCharts

I’m more bullish about IYLD’s future performance, as international equities yield more and look undervalued relative to U.S. equities.

IYLD’s yield is higher than that of the Vanguard funds, but lower than that of HNDL. The latter is mostly a return of capital distribution, however, so I wouldn’t put too much importance on it.

ChartData by YCharts

In my opinion, and taking into consideration the above, IYLD’s overall investment strategy is somewhat inferior to that of its peers, a significant negative for the fund and its shareholders. Although I do believe that the fund could serve to diversify an investor’s portfolio, IYLD is likely to underperform in the coming years.

Conclusion

IYLD’s investment strategy, diversified holdings, and good 5.5% dividend yield combine to create a comparatively low-risk fund, perfect for retirees or income investors. More aggressive and bullish investors should focus on other funds, or create their own diversified portfolios of funds themselves, as these are likely to outperform relative to IYLD.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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