Daily ETF Watch: New Reality Shares Planned

Reality Shares, the newcomer firm that launched its first ETF last year, has filed for three more funds. The three ETFs will be based on the firm’s “Divcon” rating system and offer different combinations of exposures to dividend-paying stocks.

The funds and their tickers are as follows:

• Reality Shares DIVCON Leaders Dividend ETF (LEAD)
• Reality Shares DIVCON Dividend Defender ETF (DFND)
• Reality Shares DIVCON Dividend Guardian ETF (GARD)

The Divcon methodology takes the largest 500 largest U.S. stocks by market capitalization and weeds out all the firms that have not both paid and announced a dividend in the preceding 12 months. From there, it uses a quantitative approach to score each of the remaining firms with a number from one to five based on the likelihood of the companies to raise or decrease their dividends in the future. A score of “1” indicates a firm is likely to decrease its dividend in the following 12-month period, while a score of “5” indicates a firm is likely to increase its dividend in the following 12-month period, according to the prospectus.

LEAD simply tracks an index that includes the greater of either all of the Divcon 5 companies or the 30 companies with the highest Divcon scores. In other words, it covers the stocks that are believed to be the most likely to raise their dividend in the next one-year period.

DFND, on the other hand, has a portfolio that aims to be 75 percent long and 25 percent short. It holds a long position in either all of the Divcon 5 stocks or the 30 companies with the highest Divcon scores, and it takes a short position in either the Divcon 1 stocks or the 10 stocks with the lowest Divcon scores, with the portfolio determined by whichever version encompasses more companies.

Finally, GARD also has a long/short portfolio, with the long and short positions similar to those used by DFND, but it adjusts its allocations between the long and short positions based on the “Guardian Indicator,” which is designed to measure market strength at the sector level. When at least eight of the 10 sectors indicate that the market is strong, the fund fully allocates to the long portfolio of stocks most likely to raise their dividends. And when seven or fewer of the sectors reflect a strong market, the portfolio switches to a 50 percent long and 50 percent short portfolio.

The filing did not include expense ratios, but it did indicate that all three ETFs would list on the NYSE Arca.

Reality Shares’ only fund currently trading is the actively managed Reality Shares DIVS ETF (DIVY | D-3), which targets dividend growth by investing primarily in options rather than equities. The fund currently has roughly $30 million in assets under management.

Contact Heather Bell at [email protected].