Behind Factor Bets In Dividend ETFs

Dividend ETFs have a clear appeal: generating income. And with dividend growth a recurring theme this year both in the U.S. and abroad, what’s not to like about an equity portfolio that shells out, say, an 8% dividend yield?

There are some 40 high dividend yield ETFs, several of which are billion-dollar-plus funds boasting good liquidity and narrow trading spreads. But these funds go about capturing dividend yields in very different ways, with stock selection, sector tilts and factor bets diverging significantly between comparable funds.

‘Superdividend ETF’

If you are looking for the highest-yielding ETF today, the Global X Superdividend ETF (SDIV) is your fund. With $910 million in total assets, the 96-holding portfolio is shelling out yields of 8%.

As far as global equity dividend ETFs go, SDIV is unbeaten in the quest for high yields. Its closest competitor in this segment would be the First Trust Dow Jones Global Select Dividend Index Fund (FGD), with yields of roughly 5%. FGD has 98 securities in its portfolio.

Beyond their yields, these two portfolios couldn’t be more different in country, sector and factor exposures. With the help of Bernie Nelson, president of Boston-based research firm Style Analytics, and for the sake of illustrating the importance of knowing what you own, consider the following differences that ultimately drive overall returns:

SDIV Vs. FDG

• Country Allocation: SDIV is mostly a U.S. fund, with 58% of the portfolio tied to domestic stocks. FGD has a 16% allocation to the U.S. Other country weightings are also vastly different.

• Sector Allocations: SDIV is massively invested in real estate and financials sectors at a combined 65% of the portfolio. FGD has 35% in financials, but it’s more diversified across other sectors such as consumer discretionary and telecom.

Many Factor Differences

Going one step further, factor analysis shows other key differences between these two ETFs. According to Nelson: 

VALUE: Both SDIV and FGD have strong value bias from metrics such as book to price, earnings yield, cash flow yield, sales to price, and earnings before interest, tax, depreciation and amortization. But there are many flavors of value to consider here.

“SDIV shows a more significant bias to book-to-price, earnings yield and cash flow yield. The value bias in FGD is more noticeable in sales-to-price,” Nelson said. “The choice of factor within the value style or factor category can and does matter. For example, high book-to-price has been a much weaker performer than high sales-to-price in recent years.” 

GROWTH: Both SDIV and FGD tilt toward stock with low forecast earnings growth. Neither of these funds is particularly growth-y relative to the MSCI World Index, but SDIV has a strong tilt toward companies with “much stronger” five-year revenue growth than the index, Nelson says. FGD, meanwhile, has a “slightly lower” five-year revenue growth than the index.

YIELD: SDIV has a dividend yield of more than 8.1%, while FGD has a dividend yield of about 5%. Both funds are doing a good job capturing yield if you consider a global market yield of around 2.2%, Nelson notes. These yields are not simply the result of country and sector allocations, “but is achieved through a high-yield approach even within sectors and countries,” he said.

QUALITY: Neither fund goes high into quality, but SDIV bets more on highly leveraged names, as measured by debt-to-equity. Both SDIV and FGD have a lower return on equity than the MSCI World index, Nelson says.

“Both funds are weaker than the MSCI World index on sales growth stability,” Nelson said. “It's important to look at distinct measures of quality, including profitability, financial leverage, and earnings or sales stability when examining portfolios as these different quality measures don't all perform the same.” 

SIZE: Both SDIV and FGD go smaller than the market-cap-weighted MSCI World index, but SDIV has a much more significant tilt toward smaller-cap companies—which can pay off when small-cap stocks do well relative to larger-cap names. Small- and midcaps represent 43.5% and 44.8% of the portfolio, respectively, compared with 4% in small-caps and 35% in midcaps for FGD, Nelson notes.

“These are quite different approaches to size, although both are potentially positively exposed to any small-cap factor premium,” Nelson said.

VOLATILITY: SDIV tilts to lower-beta stocks than the MSCI World index, while FGD has a slightly higher beta compared to the index.

MOMENTUM: Both SDIV and FGD are low momentum, whether measured by lower price momentum or to downward revisions to earnings estimates.

Return Drivers

This type of analysis offers a clear picture of what you are accessing with one of these dividend ETFs. Both funds sit around 100 holdings each, and both cost 0.58% in expense ratio each—or $58 per $10,000 invested. Both are also at the top of their segment, delivering some of the highest yields among global equity dividend ETFs.

But in SDIV, you are betting more strongly on value, small-cap, lower volatility relative to the index, and on some pretty leveraged companies to get top yields—all with a domestic bias, of course. In FGD, you are getting a more globally diversified portfolio that tilts a little larger, a little more volatile and a little less growth-y for a yield that’s also currently smaller.

One fund isn’t better than the other, they are just different, and these portfolio differences will translate into a disparity in returns over time, as you see in the one-year chart below. Their total return paths can diverge significantly at times. It’s always a good idea to know what you own.

Chart courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected]