On November 18, 2010, I suggested that if I could buy only one ETF, it would be Guggenheim Multi-Asset Income (CVY). The idea was to get a diverse range of asset classes that are normally in the higher-yielding dividend arena. To see the entire article, go here.
To this day, I still receive questions about this ETF, so let's review how it has performed and the outlook for the future.
On the date of the article, CVY closed at $19.83 a share. The closing price yesterday, February 9, 2012, was $21.81 per share for a gain of slightly under 10%. During that time, the S&P 500 (SPY) returned around 13%. However, CVY distributed $1.35 in dividends or about 6.8%. The drawdown of CVY from the peak in July 2011, to the bottom in October, was a couple of percentage points lower than the S&P, but it still suffered along with most every other type of equity. Total return on CVY for 2011 was 7.54% according to the company's website, while the S&P 500 SPDR returned 1.99% for the year.
It appears CVY was a good choice for 2011, but what about going forward? I would continue to hold CVY and expect to do so for 2012 barring any unforeseen circumstances. The reasoning today is the same as it was when I first mentioned it, perhaps even more so. My original attraction to the ETF was based on a desire to add a universe of unique asset classes, such as Master Limited Partnerships, Canadian Royalty Trusts, REITs, and the like. I use other ETFs to gain more specific exposure. For example, I mentioned PowerShares Financial Preferred Portfolio (PGF) and SPDR High Yield Bond (JNK) in the article and I still hold those today as well, but CVY is something of a catch-all for the other assorted high-dividend items that don't always fit neatly into a box. Since CVY is based on the Zack's Multi-Asset Income index, I feel comfortable with the research and methodology that goes into selecting the constituents.
One facet of the methodology is in the weighting. Market cap weighted indexes are a little too heavily weighted toward the top 10 holdings. Many dividend indexes have Exxon (XOM) as the top holding because of its huge market cap. That's OK if you like Exxon, but we prefer a more balanced approach. In CVY, the top holding, Kinder Morgan Energy Partners (KMP) only makes up 1.65% of the total portfolio. One of the main reasons for using ETFs in the first place is to reduce company specific risk, so for that reason, I generally prefer a more equally weighted scheme over cap weighted indexes. In addition, a regular rebalancing makes sense. The top holdings of CVY in September of 2011 look much different than the top holding now. A regular rebalance forces an index to always be buying low and selling high, which as we all learned in grade school is how it's supposed to be done.
Finally, while CVY has kept up with the S&P in this most recent rally due to holdings such as Intel (INTC) and General Electric (GE), many of the holdings have lagged but still look attractive from a valuation and yield perspective. Stocks such as Merck (MRK), Philip Morris (PM) , and utilities have had a rough go of it so far, but are the types of stocks that get rotated into when the "risk-off" trade returns.
As with any equity ETF, there is a high degree of correlation, especially during bear markets. CVY is not immune from global macro problems, so it is important to have an exit strategy. If interest rates spike considerably or recession worries re-emerge, CVY will suffer along with the overall market.
As I posted in my Instablog yesterday, the Federal Reserve is determined to keep interest rates low for quite some time. With a dividend yield of slightly over 5% and a potential for growth if the economy gets better, I continue to like CVY.