Daily ETF Watch: Dividend Fund Facelift

Daily ETF Watch: Dividend Fund Facelift

An upstart looks to reinvent the dividend-ETF space with a novel fund that takes stock prices out of the mix.

Managing Editor
Reviewed by: Olly Ludwig
Edited by: Olly Ludwig

Reality Shares Advisors, a new ETF company based in San Diego, today is launching a new kind of dividend fund that steers clear of exposure to underlying stock prices and instead seeks to isolate underlying corporate fundamentals of large-cap developed-market companies via expectations of dividend growth.

The Reality Shares DIVS ETF, which has its primary listing on NYSE Arca under the trading symbol “DIVY,” is a fund that will make use of a variety of derivative instruments—mainly options—to achieve its objective of mining dividend growth of U.S., European and Japanese large-cap stocks. DIVY comes with an annual expense ratio of 85 basis points, or $85 for each $10,000 invested. The fund is, in a legal sense, active, but its shifting allocations are governed by a rules-based system.

“The value of the Fund’s options portfolio is designed to change based primarily on changes in the expected dividend values reflected in the options’ prices,” the DIVY prospectus said. “These option combinations are designed to reflect expected dividend values and eliminate the Fund’s exposure to changes in the trading prices of the Large Cap Securities.”

Dividend-focused ETF strategies have been all the rage in the years following the financial crisis, as bond yields have remained terribly low amid what many economists have come to call “secular stagnation.” So, dividend streams shooting off stocks have loomed as potential income-replacement strategies.

That said, DIVY is a new approach to dividends, and the elimination of underlying stock-price exposure may prove to be attractive to investors who either fear capital losses in the bond market or who want to steer clear of the relative volatility of stock prices.

Today’s Reality Shares launch lifts to 197 the number of new ETFs that have been launched so far in 2014. That compares with 162 launches in all of 2013, according to data compiled by ETF.com. The pace of closures this year meanwhile looks similar to a year ago, with 68 strategies shuttered so far, compared with 69 closures last year.

Total assets in more than 1,660 ETFs are now more than $1.9 trillion. Assets keep flowing into ETFs, fund launches continue apace, and markets have mostly been pushing upward into record territory almost six years after the subprime mortgage crisis cratered markets and brought the global economy to the brink of a full-scale meltdown.

Reality Shares’ ambitions have been gestating for almost 18 months. It first filed for permission to market the Reality Shares brand of ETFs in April 2013 in active as well as index wrappers. It filed its first registration statements about a year ago, detailing plans for three dividend-focused ETF.

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Olly Ludwig is the former managing editor of etf.com. Previously, he was a financial advisor at Morgan Stanley Smith Barney and an editor at Bloomberg News. Before that, Ludwig was a journalist at the Reuters News Agency in New York.