MDIV: Inflation Is A Silent Killer

seekingalpha2023-06-03

Torsten Asmus This article series aims at evaluating ETFs (exchange-traded funds) regarding the relative past performance of their strategies and metrics of their current portfolios. Reviews with ...

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Reviews with ...</p>\n\n<a href=\"https://seekingalpha.com/article/4609082-mdiv-inflation-is-a-silent-killer\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU1989772840.SGD","symbol_name":"CPR Invest - Climate Action A2 Acc SGD-H","start_time":0,"source_url":"https://seekingalpha.com/article/4609082-mdiv-inflation-is-a-silent-killer","article_id":"2340728815","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1391643917/image_1391643917.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2340728815","pubTimestamp":1685722351,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Torsten Asmus This article series aims at evaluating ETFs (exchange-traded funds) regarding the rela","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"161125":"标普500","513500":"标普500ETF","LU1989772840.SGD":"CPR Invest - Climate Action A2 Acc SGD-H","LU0052756011.USD":"TEMPLETON GLOBAL BALANCED \"A\" (USD) INC","LU0098860793.USD":"FRANKLIN INCOME \"A\" INC","OEX":"标普100","SSO":"两倍做多标普500ETF","LU1989772923.USD":"CPR Invest - Climate Action A2 Acc USD-H","IVV":"标普500指数ETF","LU1267930227.SGD":"TEMPLETON GLOBAL BALANCED \"AS\" (SGD) ACC A","BK4160":"多样化房地产投资信托v","LU0128525689.USD":"TEMPLETON GLOBAL BALANCED \"A\"(USD) ACC","BK4585":"ETF&股票定投概念","BK4534":"瑞士信贷持仓","SDS":"两倍做空标普500ETF",".SPX":"S&P 500 Index","LU0320765646.SGD":"FTIF - Franklin Income A MDIS SGD-H1","HYLS":"First Trust Exchange-Traded Fund IV First Trust Tactical High Yield ETF","MDIV":"First Trust Exchange-Traded Fund","SH":"标普500反向ETF","LU0310800965.SGD":"FTIF - Templeton Global Balanced A Acc SGD","C":"花旗","BK4566":"资本集团","LU1363072403.SGD":"Fidelity Global Financial Services A-ACC-SGD","IE00BZ1G4Q59.USD":"LEGG MASON CLEARBRIDGE US EQUITY SUSTAINABILITY LEADER \"A\"(USD) INC (A)","LU0106831901.USD":"贝莱德世界金融基金A2","SPXU":"三倍做空标普500ETF","UPRO":"三倍做多标普500ETF","DBRG":"DigitalBridge Group, Inc.","BK4205":"房地产经营公司","BK4559":"巴菲特持仓","BK4550":"红杉资本持仓","BK4588":"碎股","ALTY":"Global X Alternative Income ETF","SPY":"标普500ETF","LU0971096721.USD":"富达环球金融服务 A","AGNC":"美国资本代理公司","LU1074936037.SGD":"JPMorgan Funds - US Value A (acc) SGD","MS":"摩根士丹利","BK4207":"综合性银行","IE00BKVL7J92.USD":"Legg Mason ClearBridge - US Equity Sustainability Leaders A Acc USD","LU1668664300.SGD":"Blackrock World Financials A2 SGD-H","IYLD":"iShares Morningstar Multi-Asset","BK4233":"房地产运营公司","BK4581":"高盛持仓","BK4504":"桥水持仓","BK4110":"抵押房地产投资信托","OEF":"标普100指数ETF-iShares","BK4127":"投资银行业与经纪业"},"translate_title":"MDIV：通货膨胀是一个无声的杀手","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"161125":0.6,"513500":0.6,"IYLD":1,"AGNC":1,"ALTY":1,"SPY":1,"C":1,"DBRG":1,"HYLS":1,"MDIV":1,"MS":1,"IVV":0.6,"OEF":0.6,"OEX":0.6,"SDS":0.6,"SH":0.6,"SPXU":0.6,"SSO":0.6,"UPRO":0.6,"ESmain":0.6,".SPX":0.6},"content_text":"Torsten Asmus This article series aims at evaluating ETFs (exchange-traded funds) regarding the relative past performance of their strategies and metrics of their current portfolios. Reviews with updated data are posted from time to time.  Strategy and portfolio  First Trust Multi-Asset Diversified Income Index Fund ETF (NASDAQ:MDIV) started investing operations on 08/13/2012 and tracks the Nasdaq US Multi-Asset Diversified Income Index, a rule-based model mixing different categories of securities. It is a high-yield ETF with a 12-month distribution rate of 6.93%, a net expense ratio of 0.72% and 125 holdings. Distributions are paid monthly. As described on FirstTrust website, the fund invests in five asset categories: equity securities, REITs, preferred securities, MLPs and high yield corporate bonds. The underlying index allocates 20% of its weight to each category. The high yield corporate bond category is represented by the First Trust Tactical High Yield ETF (HYLS). Equity securities (excluding real estate investment trusts, or REITs) must meet conditions of capitalization and liquidity, and show:  a dividend each of the last three years positive total earnings in the trailing 12 months a dividend payout ratio less than or equal to 80% One year realized volatility less than the Nasdaq Benchmark Index, one-year realized volatility plus 15%.  Then, 50 stocks passing all rules are selected and weighted by yield. REITs must meet the same criteria, with a higher threshold for the payout ratio: 150%. The index selects 25 REITs and weights them by yield. Preferred stocks must pass a similar screen, without the positive earnings conditions and with lower requirements in capitalization and liquidity. Eligible preferreds are ranked based on yield and volatility. The top 25 are included in the index and weighted by yield. The rules for MLPs are similar to those for preferreds, with specific parameters. They also result in 25 constituents.   Fund composition on 6/1/2023 (First Trust) Excluding the high yield corporate bond ETF weighting 21.54% of asset value, the top 10 holdings are listed below.   Ticker Name Category Weight   RC Ready Capital Corporation REITS 1.53%   ABR Arbor Realty Trust, Inc. REITS 1.32%   STWD Starwood Property Trust, Inc. REITS 1.28%   DMLP Dorchester Minerals, L.P. MLPs 1.27%   EPR EPR Properties REITS 1.18%   KRP Kimbell Royalty Partners, LP Other 1.17%   BSM Black Stone Minerals, L.P. MLPs 1.13%   WCC.A WESCO International, Inc., Series A, 10.625% Variable Rate Preferreds 1.10%   NS NuStar Energy L.P. MLPs 1.07%   CEQP Crestwood Equity Partners LP MLPs 1.04%   Click to enlarge It is noteworthy that three of the four REITs in this table are mortgage REITs, and they are the heaviest holdings. Several holdings in the preferred category may be issued by the same company. The top four issuers are DigitalBridge Group (DBRG) with an aggregate weight of 2.57%, AGNC Investment Corp. (AGNC) with 2.48%, Citigroup Inc. (C) with 1.60% and Morgan Stanley (MS) with 1.60%. They come ahead of the largest holding. Performance Since inception in 2012, MDIV with dividends reinvested has lagged the S&P 500 (SPY) by 9.8 percentage points in annualized return, and a 60/40 portfolio by 5.5 percentage points. Volatility is similar to the stock benchmark, but the maximum drawdown is deeper. The risk-adjusted performance (Sharpe ratio) is inferior by far to both benchmarks.     Total Return Annual. Return Drawdown Sharpe ratio Volatility   MDIV 35.38% 2.85% -48.51% 0.2 14.63%   SPY 263.03% 12.70% -33.72% 0.84 14.49%   60% SPY + 40% BND 137.55% 8.36% -21.80% 0.8 9.36%   Click to enlarge The next chart compares total returns of MDIV and three other multi-asset high yield ETFs:  GraniteShares HIPS US High Income ETF (HIPS), reviewed here, Global X Alternative Income ETF (ALTY), reviewed here, iShares Morningstar Multi-Asset Income ETF (IYLD), reviewed here.  These products are competitors, but they are structured in different ways. HIPS has four asset categories: REIT, MLP, CEF and BDC. ALTY has five, but two of them differ from MDIV: it replaces high yield corporate bonds and dividend stocks by emerging market bonds and covered calls. Starting date is 12/18/2017 to match data availability. MDIV vs. competitors since Dec 2017 (Seeking Alpha) MDIV is in the middle of the pack. However, it is the worst performer in the last 12 months: MDIV vs. competitors, last 12 months (Seeking Alpha) The annualized return since inception, reinvesting distributions, is below the distribution rate. This is a clue pointing to capital decay. The next chart confirms it: the share price has lost 29% since inception. In the same time, the cumulative inflation has been about 29%, based on CPI. This represents a huge loss in inflation-adjusted value. MDIV share price, without dividends (Seeking Alpha) Moreover, the annual sum of distributions went down from $1.18 per share in 2013 to $1.00 in 2022. For shareholders, it means an income loss of 15% in 9 years. In the same time, the cumulative inflation has been 27%. This also means a significant decay in inflation-adjusted income for shareholders. MDIV distribution history (Seeking Alpha) This decay in capital and income is not a management issue: it's just impossible to make a good recipe with bad ingredients. Securities with yields above 6% suffer from capital decay on average (there are rare exceptions). MDIV can be useful for swing trading or tactical allocation, but history shows it may be harmful as a long-term investment. This is true for most high-yield funds, not only this one.  Bonus: how to avoid capital decay in high-yield funds  Capital and income decay is an issue in many closed-end funds, like in high yield ETFs. However, it may be avoided or mitigated by rotational strategies. I designed a 5-factor ranking system in 2016, and monitored its performance during several years. I started publishing the eight best ranked CEFs in Quantitative Risk & Value (QRV) after the March 2020 meltdown. The list is updated every week. It isn’t a model portfolio: trading the list every week is too costly in spreads and slippage. Its purpose is helping investors find funds with a good entry point. In the table below, I give the hypothetical example of starting a portfolio on 3/25/2020 with my initial “Best 8 Ranked CEFs” list and updating it every 3 months, ignoring intermediate updates. Return is calculated with holdings in equal weight and reinvesting dividends at the beginning of every 3-month period.   Since 3/25/2020 Total Return Annual.Return Drawdown Sharpe ratio Volatility   Best 8 CEFs quarterly 118.67% 27.83% -20.60% 1.16 20.16%   MDIV 52.83% 14.24% -15.29% 0.72 16.28%   SPY 78.93% 20.03% -24.50% 0.92 18.70%   Click to enlarge This simulation is not a real portfolio and not a guarantee of future return  Of course, past performance (real or simulated) is not representative of future return. However, I think a time-tested rotational strategy in CEFs has a much better chance to protect both capital and income stream against erosion and inflation than a high-yield ETF.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2340728815"}