The Innovative Side Of Dividend ETFs

February 13, 2017 How do you compare DIVY’s performance to long/short equity funds in the market? Or what’s DIVY’s main competitor?

Ervin: The best one to compare it to would be the IQ Hedge Multi-Strategy Tracker ETF (QAI), which is basically designed to deliver stable returns without much volatility. A lot of long/short funds have a lot more volatility.

Look at the Sharpe ratio: Essentially, give me all of the returns, divide it by the risk, and that's my overall dream ratio that I want to be as high as possible. Based on that ratio, DIVY is the best-performing ETF of all of the alternative ETFs, because that risk-adjusted return—which is the nirvana of all ETFs—is so high; it's 2.0.

And DIVY doesn't have any correlation to bonds. It doesn't have any correlation to hedge funds. And it doesn't have any correlation to stocks. It has low risk, good returns and no correlation; it’s the perfect diversifier. But it's never going to be up 15 or 20%, ever, because it's just not designed to do that. In the context of a balanced portfolio, how do you see investors using DIVY? How do you implement it?

Ervin: I’d use it as a diversifier for bonds—what you used to use bonds for, which was to reduce risk and to be a safety net.

When stocks went down, you always had money to rebalance into the stock market with your bond profile. But in this world, with bonds as low as they are, and with interest rates starting to rise, bonds have a lot more downside risk than people otherwise used to think. DIVY is a diversifier for those bond assets—a lot of institutional investors such as pensions, endowments and foundations all think of it as an alternative to their bond exposure. Is the current macro environment a good time to consider an absolute-return strategy?

Ervin: Yes. This is our time to shine, because the equity market has a lot more risk in it and the bond market has a lot more risk in it. People should be allocating more to strategies like this. Many of the liquid alternatives out there are really just high-priced T-bills. And if you think the hedge fund's the traditional diversifier, remember that they've really gotten a lot more correlated to stocks, so they're hiding an awful lot of equity market risk in the average hedge fund.

The other thing you have to think about is that the primary driver of DIVY is the dividends rise. Everything is pointing towards rising dividends with the new administration, as Trump wants to cut corporate taxes, which means more cash that can be paid out to shareholders. It's a really positive thing for this kind of a portfolio.


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