Dividend ETFs have been on a tear this year thanks to a dip in bond yields. And with the Fed’s decision to maintain the near-zero interest rate policy for long and easy money policies in several developed economies and some emerging economies too, some have started to speculate that lower rates may stay for a bit longer, indicating that dividend ETFs may be solid plays at the current level.
This importance of income plays can be understood from the recent dividend ETF filing by the Reality Shares Advisors, the latest ETF brand of ERNY Financial Advisors. The proposed product – Reality Shares DIVS ETF – will carry a ticker symbol of DIVY, per the prospectus. The fund will be actively managed in nature.
Proposed Fund in Focus
The Reality Shares DIVS ETF looks to generate long-term capital appreciation. The fund will dig for “expected dividend values” of the large cap stocks hailing from the U.S., Europe and Japan. The fund looks to charge 85 bps in fees.
The uniqueness of the fund is its policy to generate returns based on increments in the expected dividend values of the underlying stocks, rather than the stock market appreciation of the same. And to so this the fund looks to invest in a mix of listed option contracts, total return swaps, dividend swaps, futures and forwards on indexes of large cap stocks or ETFs consisting of large-cap stocks.
The fund will experience a positive rate of return if the ‘actual future growth’ in dividends surpasses the ‘expected growth in dividends’. The opposite case will happen if the ‘actual future growth’ falls behind the ‘expected future growth” although actual realized dividends have risen during the holding period of the fund, per the prospectus.
How Does it Fit in a Portfolio?
This ETF could be an interesting choice for investors seeking to make a play on companies that are poised to pay fat dividends over time (see 4 Excellent Dividend ETFs for Income and Stability).
Investors should take note that dividends provide a steady stream of income and have accounted for more than 40% of the total market returns over the past eight decades. Moreover, dividend paying companies are also comparatively less volatile and more mature with solid cash flows and thus provide greater stability. Also, the fund is expected to provide global diversification to a portfolio.
Moreover, the product targets stocks from the U.S., Europe and Japan where ultra-low interest rate policies are prevailing currently. Japan has also stepped up its already massive stimulus program. The Euro zone is thought to be nearing a launch of its own QE program while the Fed has vowed to keep the rates low for as long as the economy needs it. Thus, an appeal for dividend investing can be predicted in these regions.
ETF Competition
The dividend ETF market is chock-full of players. Vanguard Dividend Appreciation ETF (VIG) rules the space with about $21 billion in assets. However, the proposed ETF’s use of option contracts to play the space will certainly differentiate it from the crowd, if the candidate gets approval at all. Even if there are not many foes in the way of the proposed fund, there are several dividend-centric products to consider with unique strategies.
AdvisorShares Athena High Dividend ETF (DIVI) is one such actively managed fund which uses AthenaInvest’s patented behavioral research to generate long-term capital appreciation. The Ultra Dividend ETF (RDIV) looks to give investors a way to target income producing securities in the U.S. market, with a focus on weighting by revenue instead of market capitalization levels (read: AdvisorShares Launches Unique Active Global Dividend ETF).
If these were not enough, there are many dividend growth ETFs which concentrate on dividend growth rather than high yields. These might threaten the proposed ETF (read: Dividend ETFs Explained: What Investors Need to Know).
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