Market Overview

Under The Hood: Doing it With Dividends (GYLD, PERM)

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The ETF industry has been quick to meet investor demand for income-generating products, helping dividend funds become one of the fastest-growing sub-sectors of the ETF universe. Not all dividend ETFs come courtesy of iShares, Vanguard or other major issuers, though.

One new example of a dividend ETF from a smaller fund sponsor that income investors may want to consider is the Arrow Dow Jones Global Yield ETF (NYSE: GYLD). The Arrow Dow Jones Global Yield ETF debuted in early May. GYLD, which charges 0.75% per year and tracks the Dow Jones Global Composite Yield Index, is a multi-asset play, meaning the fund is not focused solely on stocks or bonds.

Rather, GYLD offers exposure to five investment themes: Global alternatives (19.4%), global corporate bonds (20.7%), international stocks (19%), global REITs (20%) and global sovereign debt (20.2%). The semi-equal weight approach among multiple assets is similar to what the Global X Permanent ETF (NYSE: PERM), which debuted in February does, but there are stark differences between these two ETFs.

For example, about a quarter of PERM's weight is allocated to gold and silver ETFs and that fund is also heavy on U.S. Treasuries.

While the numbers may fluctuate, GYLD aims to hold about 30 securities from each asset class represented withing the fund. The alternatives group is comprised primarily of master limited partnerships, some of which likely ring a bell with MLP investors, including Energy Transfer Partners (NYSE: ETP) and Martin Midstream Partners (Nasdaq: MMLP).

GYLD's corporate bond exposure includes issues from Alpha Natural Resources (NYSE: ANR), Consol Energy (NYSE: CNX) and Chesapeake Energy (NYSE: CHK).

Regarding GYLD's risk profile, it's neither the fund's MLP nor corporate bond exposure that is problematic. The fund's allocations to international stocks and REITs would be a fine idea in a more sanguine market environment as many of the names found in the ETF are higher quality, large-caps that are being battered because of Europe's sovereign debt crisis.

Europe's debt woes provide a good segue into discussing the biggest risk with GYLD. The ETF's foreign debt holdings have a PIIHS problem. Said differently, GYLD holds sovereign debt issued by Portugal, Ireland, Italy,Hungary and Spain. Obviously, that's a risky gambit at the moment.

It is widely known that yields have blown out to euro-era record highs on Spanish sovereigns and Italian bonds are sporting elevated yields. Those factors imply that in the event of any good news leading to true austerity measures in Europe, yield-hunters with an appetite for risk could be rewarded by GYLD. To that end, GYLD does not skimp on yield as its underlying index carried a composite yield of 7.43% at the end of the first quarter.

The bottom line with GYLD is that it is a unique concept for yield-hungry investors, but with the fund's exposure to European sovereigns, this ETF might be more suitable for younger investors or those with a high tolerance for risk, not those investors looking for retirement income.

For more on dividend ETFs, click here.

Posted-In: News Sector ETFs Bonds Dividends Dividends New ETFs Futures Commodities Best of Benzinga


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