Safety And Sustainability With A New High Dividend ETF
High-yield stocks and the corresponding exchange-traded funds often tempt investors. Some novice income investors see a gaudy yield and are immediately seduced, without considering the current safety of that dividend and the company's ability to continue growing the payout.
The recent (and substantial) dividend cut by Kinder Morgan Inc. (NYSE: KMI) serves as a reminder that some high-yield stocks are vulnerable to payout cuts. A new dividend ETF looks to deliver exposure to stocks with robust yields, but more importantly, high-yield stocks that have the ability to sustain and grow those dividends.
A Look At ELKU
The Elkhorn FTSE RAFI U.S. Equity Income ETF (NYSE: ELKU) (BATS: ELKU) debuted Thursday as the second ETF from Illinois-based Elkhorn Investments. Elkhorn's first ETF, the Elkhorn S&P 500 Capital Expenditures Portfolio (NASDAQ: CAPX), debuted in May.
The Elkhorn FTSE RAFI U.S. Equity Income ETF follows the FTSE RAFI U.S. Equity Income Index, “which is designed to measure the performance of high yield stocks in the United States which have been screened to target sustainable income. Index constituents are selected and weighted using four fundamental factors, as opposed to market capitalization,” according to Elkhorn.
That index looks to eliminate companies with financial problems that could prompt dividend cuts or suspensions while mitigating sector concentration risk. Speaking of sector risk, the Elkhorn FTSE RAFI U.S. Equity Income ETF may be a high dividend ETF, but its combined exposure to the interest rate-sensitive telecom and utilities sectors is light at just 7.5 percent. That is something to consider as the Federal Reserve gets closer to raising interest rates.
Led by financial services at 15.6 percent, seven sectors command double-digit allocations in the new ELKU. Consumer staples and technology both check in at just under 14 percent. ELKUs' 13.8 percent weight to technology stocks is high among dividend ETFs and the fund features two tech stocks – Microsoft Corporation (NASDAQ: MSFT) and International Business Machines Corp. (NYSE: IBM) – among its top 10 holdings.
Consumer discretionary, energy and industrial stocks all receive weights north of 11 percent in the new ETF. As of November 30, 2015, the dividend yield of the FTSE RAFI U.S. Equity Income Index is 3.5 percent, according to Elkhorn.
Place On The BATS
ELKU is the latest ETF to list on the BATS ETF Marketplace, continuing the Kansas-based exchange operator's recent growth surge.
“BATS had the lowest effective spread in 64 percent of the top 50 ETPs in November and remained the top exchange operator for ETF trading with 26.5 percent market share for the month. BATS has been the #1 U.S. market for ETF trading for every month of 2015 and the #2 U.S. market for overall equities trading,” according to a BATS statement.
Home to 159 stocks, ELKU charges 0.39 percent per year, or $39 for every $10,000 invested.
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