First Trust introduces international multi-asset income ETF

Aug 27th, 2013 | By | Category: Alternatives / Multi-Asset

First Trust, a provider of exchange-traded funds (ETFs), has launched a new ETF designed to provide low-volatility exposure to a diverse international portfolio of high-yielding instruments.

First Trust introduces international multi-asset income ETF

The First Trust International Multi-Asset Diversified Income Index ETF has made its debut on the Nasdaq Stock Market. (© Copyright 2013, The NASDAQ OMX Group, Inc.)

The fund is latest addition to a growing roster of multi-asset income ETFs, which includes products from iShares, Guggenheim, ArrowShares and SPDR.

Listed on the Nasdaq Stock Market, the First Trust International Multi-Asset Diversified Income Index Fund (YDIV) is linked to the Nasdaq International Multi-Asset Diversified Income Index.

The fund provides international exposure to a diversified mix of asset classes in a single investment portfolio that has built-in volatility screens.

Yield is the main driver behind the index; however, within each asset class a maximum volatility cap is used that seeks to limit securities that have high yields strictly due to poor price performance. This helps mitigate the risks often found when “reaching for yield.”

Specifically, the individual asset class segments (with the exception of fixed income) each exclude any security whose trailing one-year realised volatility is 15 percentage points or more above that of its more broadly defined benchmark universe. For example, if the one-year realised volatility of the equity benchmark universe is 20%, then any single stock eligible for inclusion whose one-year realised volatility is 35% or more, irrespective of its yield or other factors, cannot be included in the index.

The portfolio is further diversified within each asset class. As a result, the fund provides the potential for a lower-risk total return alternative to investing solely in one asset class. Since income is generated from multiple sources, the fund may provide less interest-rate sensitivity than traditional fixed-income securities.

The index is comprised of international dividend-paying stocks, international real estate investment trusts (REITs), non-US infrastructure companies, non-US preferred securities and an ETF (represented by EMB, the iShares JP Morgan USD Emerging Markets Bond ETF) that invests in non-US debt instruments.

Every asset class has its own set of eligibility criteria, and every security in the index is non-US-listed and meets stringent eligibility criteria based on liquidity, size, volatility and yield. The index is rebalanced in every quarter.

Commenting on the launch, Ryan Issakainen, Senior Vice President and ETF Strategist at First Trust, said: “The fund will seek to deliver a relatively high level of income for investors, while also providing diversification benefits to traditional fixed income portfolios. This diversified approach, with built-in rebalancing, may also help income-seeking investors maintain discipline during periods of volatility.”

David Krein, Managing Director of Research at Nasdaq OMX, added: “We are proud that First Trust has selected the Nasdaq International Multi-Asset Diversified Income Index as the basis for their most recent ETF launch. The Nasdaq International Multi-Asset Diversified Income Index is an extension of our already successful Nasdaq US Multi-Asset Diversified Income Index methodology, as it pulls together several high-yielding asset classes from among select international markets into a single diversified and risk controlled index. We’re delivering solutions that product providers and investors have demanded in the current environment, which underscores Nasdaq Global Indexes’ commitment to innovation in the dividend and income index markets.”

The fund has an expense ratio of 0.70%.

While multi-asset income ETFs have proved popular in the US, they have not yet been transported to the UK and wider Europe. Deutsche Asset & Wealth Management is only ETF provider to have partly ventured into this space with the launch of a couple of multi-asset products, albeit not explicitly focused on income. These include the London-listed db X-trackers SCM Multi Asset UCITS ETF (XS7M) and the Deutsche Börse-listed db X-trackers Portfolio Total Return UCITS ETF (XQUI).

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