Market Overview

This Dividend ETF Isn't The Same Old Song

ETF sponsors have capitalized on the low interest rate environment by introducing an array of new products to income investors over the past several years. 2012 has been no different as a spate of new dividend ETFs have debuted and there are more in the works.

Ample choice is good for investors. However, as the dividend ETF sector grows more crowded, it becomes harder for fund sponsors to set products apart and more difficult for investors to parse through an array of funds, many of which look the same.

Many dividend ETFs are home to the usual blue-chip suspects such as Coca-Cola (NYSE: KO), Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG). Fine stocks for long-term investors certainly, but it is hard for a dividend ETF to stand out when names like these are among its top holdings.

The Global X SuperDividend ETF (NYSE: SDIV), which just crossed the all important $100 million in assets under management watermark, is one dividend ETF that stands out in an environment where "high yield" can be considered three or four percent.

And it is in yield terms that SDIV sets itself apart. The ETF has a 30-day SEC yield of 7.7 percent and a trailing 12-month yield of almost 8.1 percent, according to Global X data. Just 20 other ETFs yield seven percent or more.

Just because SDIV sports a robust dividend yield, does not mean the fund is inherently risky.

"When you think about income products, there is fixed income where higher yield equals higher risk," Global X CEO Bruno del Ama said in an interview with Benzinga. "High yield is engrained in investors' minds as high risk with bonds. That is not the case with equities."

SDIV's secret when it comes to yields lies with its holdings. This ETF is not home to likes of Coca-Cola or Procter & Gamble. Rather, SDIV takes an equal-weight to approach to 100 stocks ranging from CenturyLink (NYSE: CTL) to American Capital Agency (NASDAQ: AGNC) and Apollo Investment (NASDAQ: AINV). Those are just a few of the names investors might be familiar with.

SDIV is global in scope as less than 36 percent of the fund's weight is allocated to U.S. companies. The international bias leads to higher volatility relative to U.S.-focused dividend ETFs, but that is not the case when comparing SDIV against an international dividend ETF.

"When you look at SDIV compared to a U.S. dividend fund, the international weight accounts for the difference in volatility," del Ama said. "Apples-to-apples, when SDIV is compared to another international dividend ETF, the returns are better and the volatility is lower."

As one example, SDIV has outperformed the iShares Dow Jones International Select Dividend Index Fund (NYSE: IDV) by 75 basis points. Add to that, SDIV's 30-day SEC yield is more than double that of IDV's.

France, Italy, Germany and Greece combine for over 20 percent of IDV's weight. On the other hand, Eurozone nations represent just six percent of SDIV's weight. The equal-weight approach helps minimize risk in SDIV.

"SDIV's risk is minimized because each stock is just one percent of the ETF's weight," said former hedge fund manager Dennis Mykytyn in an interview with Benzinga. "There is risk in high yield stocks and that is why SDIV's diversification is a good thing. Comparing SDIV to a U.S. dividend ETF is meaningless."

He might be right. Year-to-date, SDIV has narrowly outpaced the SPDR S&P Dividend ETF (NYSE: SDY), but has lagged the Vanguard Dividend Appreciation ETF (NYSE: VIG) and the iShares High Dividend Equity Fund (NYSE: HDV) by decent margins.

Those numbers are based on performance, not total returns, which Mykytyn is adamant investors should focus on.

"I almost never see charts including dividends," he said "Part of it is historical. Wall Street focuses on growth in stock prices and ignores dividends. I care about total returns. If you're collecting eight percent a year in dividends, your principle doubles in nine years. Dividends and compounding are the way to go in investing."

Along those lines, it is worth nothing SDIV's trailing 12-month yield is more than double that of HDV's and nearly quadruple VIG's. Simple math dictates the concept of the super dividend will reward long-term investors and that could mean more inflows for SDIV as more investors take notice. SDIV, which pays a monthly dividend, had $56.3 million in AUM in mid-April. Today, the number is approaching $111 million.

"There has been a lot of talk about dividend securities, but we think we're in just the third inning of that conversation," del Ama said. "Low yield has been overdone and super dividend is the new story."

For more on dividend ETFs, click here.

Posted-In: Long Ideas News Short Ideas Dividends Dividends Specialty ETFs Intraday Update Markets Best of Benzinga

 

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