Rival Fund Sidesteps Hazards
DFND's only "long-short" dividend ETF competitor, QuantShares Hedged Dividend Income Fund (DIVA), has managed to avoid similar hazards by shorting companies with low or inconsistent dividends.
The funds' differing approaches to determining what is a good short make for very different holdings. While DFND is long Citigroup, suggesting it predicts the bank could raise its dividend, DIVA is shorting the bank, because the current dividend is relatively small.
DIVA also spreads bets across more stocks, smoothing out overall performance. The fund shorts about 200 companies, while DFND bets against nine. DIVA's average long position is up 18%, while its average short is up 14%.
Among DIVA's top bets are that Nordstrom, Targa Resources and Macy's could rise, while SBA Communications Corp., WPX Energy Inc. and Zayo Group Holdings could fall.
Higher Costs With Shorting
DFND is about $2.9 million in size, while DIVA invests $3.9 million in assets. Both ETFs have expense ratios below 2%, which is above average, in part because shorting stocks is typically more expensive than going long.
Helping both funds is the fact that they buy larger positions in their long holdings than their shorts.
Overall, DFND is down 3% since January, with its rival up 14.4% over the same period. The SPDR S&P 500 ETF Trust (SPY) has climbed around 8.5% this year, including dividends.
Reality Shares' Ervin is not backing down, warning investors that buying companies for their dividends without attention to their quality cannot work forever. In addition to holding on to the underperforming shorts, the ETF is betting on a rise in dividend-paying Tyson Foods, Waste Management and Linear Technology.