Dividend ETFs Ease the Pain of a Down Year

U.S. equity ETFs exposed to highest yield are beating broader markets.

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Reviewed by: Heather Bell
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Edited by: Heather Bell

As falling stock prices put a damper on exchange-traded fund industry inflows, dividend-focused U.S. ETFs have been moving in the other direction.  

The category, with nearly 80 funds and more than $300 billion in assets under management, has pulled in $46 billion in flows year to date. That’s crushing the $34.4 billion that the funds have been bringing in annually on average for the past three years. 

While dividend funds are mostly losing money this year, they’ve lost less than plain vanilla ETFs that are based solely on market capitalization. For example, the dividend-focused SPDR Portfolio S&P 500 High Dividend ETF (SPYD) is down a little more than 2% year to date, while the large cap SPDR S&P 500 ETF Trust (SPY) is down more than 16%. SPYD tracks the 80 companies in the S&P 500 with the highest dividend yields.  

However, an equity fund needn’t be weighted by dividends or select stocks based on dividends to offer income. Research and analysis firm MSCI measures a variety of factors to which U.S.-listed ETFs are exposed. This includes yield factor, which is essentially based on dividend yield. A look at the top 10 U.S. equity ETFs in terms of exposure to the yield factor presents a range of funds. 

Only three have the word “dividend” in their names, but just as many or more reference master limited partnerships or real estate. The factor exposures-to-yield ratio among the top 10 range from 2 to 3.44. Consider that SPY offers an exposure of just 0.04, while SPYD has a factor exposure to yield of 1.27. 

The dividend yields offered by the top 10 range from 6.49% to 9.96%, and nine of the 10 funds with exposure to the yield factor are also included in the top 10 ETFs for yield factor exposure. The $24 million Hoya Capital High Dividend Yield ETF (RIET) actually has the fifth highest dividend yield among U.S. equity ETFs according to data from ETf.com. It’s not included in the comparison based on yield factor exposure (likely because MSCI does reviews annually and the fund has not yet been trading for one year.)  

 

TickerFundInceptionAUMYield FactorDiv YieldYTD ReturnYTD Flows
AMZAInfraCap MLP ETF10/1/2014$330.62M3.447.17%31.96%-$12.37M
MORTVanEck Mortgage REIT Income ETF8/16/2011$188.53M3.239.96%-16.99%-$56.11M
BIZDVanEck BDC Income ETF2/12/2013$544.16M3.238.87%-4.61%$70.30M
REMiShares Mortgage Real Estate ETF5/1/2007$766.31M3.239.85%-16.74%-$329.65M
KBWDInvesco KBW High Dividend Yield Financial ETF12/2/2010$432.74M3.009.65%-11.32%$10.68M
MLPAGlobal X MLP ETF4/18/2012$1.29B2.626.85%27.65%$38.22M
AMLPAlerian MLP ETF8/23/2010$6.58B2.536.58%28.62%$475.11M
KBWYInvesco KBW Premium Yield Equity REIT ETF12/2/2010$294.48M2.236.77%-11.87%-$0.34M
DIVGlobal X SuperDividend U.S. ETF3/11/2013$711.97M2.056.49%-1.40%$46.93M
XSHDInvesco S&P SmallCap High Dividend Low Volatility ETF12/1/2016$25.75M2.006.57%-15.12%$10.04M

Source: FactSet, data as of 9/13/2022

 

MLP ETFs 

Real estate investment trusts, MLPs and other so-called pass-through securities are known for their ability to produce income. It’s not surprising that the fund with the highest yield exposure is the $334 million InfraCap MLP ETF (AMZA). The fund also has an impressive dividend yield of 7.17% and an outsized year-to-date return of nearly 32%. 

Meanwhile, the $1.3 billion Global X MLP ETF (MLPA) has a yield factor of 2.62 and a dividend yield of 6.85%. The $6.7 billion Alerian MLP ETF (AMLP) has been around since 2010. Its yield factor exposure stands at 2.53. Interestingly, AMLP has seen the strongest inflows of any fund in this group by far, gaining $475 million year to date, with the fund in second place, pulling in only about $70 million. 

Other Pass-Through ETFs 

The $748 million iShares Mortgage Real Estate ETF (REM) similarly tracks an index of commercial and residential mortgage REITs and has a year-to-date return of roughly 17%. It also sports the same factor exposure as the $185 million VanEck Mortgage REIT Income ETF (MORT) and comes with a dividend yield of 9.85%. MORT has the second highest yield factor exposure, at 3.23, and the highest dividend yield in the group, at almost 10%. That said, its performance is dismal, with a decline of nearly -17% year to date. REM leads the group in outflows, losing roughly $330 million year to date. 

The $280 million Invesco KBW Premium Yield Equity REIT ETF (KBWY) is another ETF focused on the REIT space, but specifically targeting small- and midcap securities. It also weights its holdings by dividend yield. However, it’s done noticeably better than the other REIT-focused ETFs in the group, with a negative return of 11.87%. However, its dividend yield of 6.77% is also noticeably lower, and its yield factor exposure is 2.23.  

Dividend Funds 

Interestingly, only one of the funds with “dividend” in its name is in the top five funds by yield factor. The $417 million Invesco KBW High Dividend Yield Financial ETF (KBWD) has a yield factor of 3 and a respectably high dividend yield of 9.65%, which is not surprising, as its portfolio tilts heavily to small cap value and is weighted by dividend yield. The fund is down just 11.32% year to date.  

Final Thoughts 

If you’re looking for income, a fund that has “dividend” in the name might not be your best bet. However, if you’re selecting by yield factor exposure, you’re essentially selecting companies with the highest dividend yields. Funds tracking pass-through securities seem to offer the highest yields rather than funds specifically targeting the dividends of common stocks.  

None of the ETFs in this group exhibited significant underperformance relative to the broader market, while some, especially the MLP funds, have significantly outperformed.  

 

Contact Heather Bell at [email protected] 

Heather Bell is a former managing editor of etf.com. She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.