In a paper produced by Deutsche Asset & Wealth Management, the authors identified a number of higher-yielding ETFs currently available that had low historical correlations and would enable investors to build income-generating portfolios customised to specific risk return targets.
“Our results show, cross asset diversification can help investors to target higher yield to volatility ratios at the portfolio level,” said the report’s authors Vincent Denoiseux and Pierre Debru of the wealth manager’s Passive Asset Management division.
The authors said that whatever the risk appetite of an income-focused investor, their research suggested that a holistic, cross market perspective to the task of generating income can be shown to make sense.
Income challenge
Investors everywhere are struggling to generate income from their portfolios given that interest rates and dividend yields are currently at close to historic lows around the world.
The Deutsche AWM paper noted that in the US, government bond yields and equity market dividend yields were over 50% below their long term average at the end of 2014. In Europe, it said the annual income from an index of European government bonds had fallen by 72% between 1999 and 2015.
After examining a range of income focused ETF products and looking into their historical volatility and correlation performances, the authors of the report produced examples of optimal portfolios with prospective annual yields of 3% and 4%.
Portfolio profile
In the example of an ETF portfolio with a 4% target yield, the authors recommended a 15% weighting of two major equity dividend indexes, combined with 15% weightings for four different liquid eurobond and corporate high yield bond indexes and smaller weightings to a sovereign euro zone bond index and a global infrastructure securities index.
The indices of corporate and high yield bonds still yielded above 4% at the end of June 2015 as did an index of infrastructure securities.
”Thanks to the low historical correlations between a number of higher-yielding portfolio assets, diversified income-oriented portfolios can demonstrate interesting risk-adjusted yield opportunities.” the authors concluded.
