Dividend Multiplier ETFs: A Multipronged Approach Amid Volatility

Dividend Multiplier ETFs: A Multipronged Approach Amid Volatility

Why these exchange-traded funds deserve more attention from investors.

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Reviewed by: Lisa Barr
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Edited by: Daria Solovieva

Traders leaning into large cap growth have been richly rewarded this year. For those still committed to the trade, but hoping for more dividend income perhaps to hedge the summer months, a unique “dividend multiplier” strategy could offer the perfect solution.  

The Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF (QDPL) and the Pacer Metaurus US Large Cap Dividend Multiplier 300 ETF (TRPL) are designed for investors who want the capital appreciation opportunities of the S&P 500 as well as a higher yield.  

It is a multipronged approach that avoids the price caps of covered call ETFs or the leverage that you might see in other products. Each exchange-traded fund keeps most of its portfolio—for example, 86%—passively invested in the S&P 500, but shifts 14% into a collection of dividend futures contracts.  

By deploying a percentage to pay for a series of long positions in these contracts, QDPL is generating a distinct “investment asset”—a dividend strip—that multiplies the initial, ordinary dividend yield of the S&P 500 Index.  

This operation trades away a fraction of index performance in favor of contract exposure that will be either three or four times the index’s typical yield. And by combining a long position in dividend futures with the corresponding full collateral, QDPL is creating a synthetic that replicates the S&P 500’s dividend payment. The graphic below helps to visualize the process: 

 

QDPL Strategy

 

The added kicker is that, historically, the forward dividend expectations of the S&P 500 index (the dividend futures price) have been substantially lower than the realized dividend (the settlement value of the dividend futures contract), so the ETF often gains further performance via the risk premium.  

Conceptually, the ETF offers the best of both worlds. Fear of missing out is avoided. Investors can still be in the game—preserving the potential for those big 10%-20% leaps of capital appreciation that come with the growthy S&P 500 in good years, while getting a very high level of distributable cash flow.  

Retirees might like the quarterly income and younger investors can reinvest. More than half of the S&P 500’s total return has come from dividends and reinvestment over the past 35 years, and TRPL and QDPL accelerate that process. A one-year chart of QDPL’s total return (up 7%) vis-a-vis price return (.5%) shows how it works: 

 

QDPL Total Return vs Price Return 5/24/2022-5/25/2023

 

This ostensibly “better mousetrap” on the part of TRPL and QDPL has not really gotten much attention (or assets under management love), perhaps because of their high expense ratios or their launches in July 2021, just a few months before the big market drawdown.  

However, comparing TRPL and QDPL to the SPY and arguably their clearest competitor, the SPDR Portfolio S&P 500 High Dividend ETF (SPYD), is instructive. SPYD has a super low expense ratio of 0.07%—which explains its $6.1 billion in AUM—and its yield is 4.76%.  

Comparatively, QDPL is far more expensive, at 0.79%, with $just 116.2 million in AUM and a dividend of 6.93%. Yet comparing the one-year chart, we see why these Pacer ETFs might be consequential to the right portfolio.  

 

QDPL Comparison

 

QDPL is up 5.62%, nearly keeping abreast of the SPY, in total returns, while SPYD is down a substantial 15.54%.  

Whereas SPYD and its value component looks likely to retest its October lows, the technical indicators for QDPL look robust. 

 

 

 

The unexpected resilience of large cap growth since January is clearly shown in this chart, something that has embarrassed the bears and proven the merits of staying long and fully invested (TRPL and QDPL’s inherent premise). Friday’s gap-up above a line of resistance from Feb. 1 through to May 23 is particularly auspicious.  

Though expensive, TRPL and QDPL clearly offer an interesting way to stay committed to the “growth” components of the S&P 500, while adding real income and mitigating volatility.  

Maybe the markets are recalibrating what recession means in 2024, a shallow downdraft for the cyclicals, and one in which AI advancements unexpectedly push new corporate spending. Mega tech yet again expands and conquers.  

Sean Daly writes on ETFs, biotech and wealth management. He was educated at Columbia University and has taught international finance, computing and financial risk management at Pace, Tulane and Princeton. Follow him on Twitter (X) via @Sean_Daly_.