Visual Risk Analysis Of The SPDR Income Allocation ETF (INKM)

by on April 30, 2013 | ETFs Mentioned:

When it comes to portfolio allocation strategies, most investors strive to cast a wide net over the entire investment landscape, capturing both lucrative opportunities and diversification benefits. While there are numerous strategies that can be used to achieve this objective, ETF issuers have sought to fill this demand with the introduction of multi-asset ETFs. As the name suggests, these funds aim to be an “all-in-one” type product, offering investors exposure to multiple asset classes through a single ticker [see 101 ETF Lessons Every Financial Advisor Should Learn].

And while these products may seem like an ideal “one stop shop,” a close look under the hood of these products reveals several factors investors should be mindful of.

How the Income Allocation ETF (INKM) Stacks Up Against Its Own INKMHoldings

In the multi-asset space, one of the most popular funds is the SPDR SSgA Income Allocation ETF (INKM, A), which seeks to deliver total return by focusing on income and yield-generating asset classes. This quasi-dividend product obtains this objective by investing in other State Street ETFs, making it a “fund of funds” [see 8% Yield ETFdb Portfolio].

Of the 23 individual holdings, however, more than a third of total assets are allocated to two funds: the SPDR Barclays Long Term Corporate Bond ETF (LWC) and the SPDR S&P Dividend ETF (SDY). While this is not necessarily a bad thing, it does mean that INKM’s performance is highly dependent on these two ETFs.

The chart below illustrates the differences between risk/return profiles of INKM and its top five holdings. Note that the risk/return profile is defined by a fund’s 200-day volatility and trailing one-year return, while the respective annual dividend yield of each ETF is represented by the size of each bubble [see What's In My Multi-Asset ETF?]:

  • SPDR Income Allocation ETF (INKM, A)
  • SPDR Barlcays Capital Long Term Corporate Bond ETF (LWC, B)
  • SPDR S&P Dividend ETF (SDY, B+)
  • SPDR S&P International Dividend ETF (DWX, B)
  • SPDR Wells Fargo Preferred Stock ETF (PSK, A)
  • SPDR Barlcays Long Term Treasury ETF (TLO, B)

The Bottom Line

It is important to note that the chart above is based on trailing returns, and as such, its composition is subject to changes over time. When solely looking at performance, INKM fails to completely capture the stellar performance of the S&P Dividend ETF (SDY), which has gained over 20% over the trailing 1-year period. INKM does, however, offer investors a slightly higher yield than SDY, but it is still significantly lower than DWX’s attractive 5.4% yield. In regards to risk, INKM does a nice job of reducing volatility, seeing as how four out of the five top holdings exhibit higher risk characteristics.

While there is no universally right answer as to whether a “total portfolio” ETF is more effective than individually selecting a portfolio of funds, it is important for investors to take a close look under the hood of these products to determine which combination of risk and return is appropriate.

Follow me on Twitter @DPylypczak.

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Disclosure: No positions at time of writing.