High dividend yields have been known to tempt many an income investor, but in an investment landscape where rising interest rates are at the forefront, dividend seekers need to be careful with stocks and exchange traded funds sporting lofty yields.
Due to large weights to rate-sensitive asset classes such as master limited partnerships (MLPs), real estate investment trusts (REITs) and utilities stocks, the Global X SuperDividend U.S. ETF (NYSEArca: DIV) has a trailing 12-month dividend yield in excess of 7%.
The fund also includes a low-volatility filter to diminish volatility in the portfolio. Specifically, underlying holdings must have a beta of less than 0.85 relative to the S&P 500 to be included in the index. Beta is a measure of volatility, and stocks with 1 reading reflects perfect correlation, so anything below 1 suggests the security is less volatile than the market. [A Dividend ETF Right for the Times]
The point about DIV’s exposure to MLPs and mortgage REITs is an important one. Combine those asset classes with utilities stocks and we’re talking about a significant portion of DIV’s lineup. Mortgage REITs are very sensitive to rising rate risks as any changes to short-term rates can have a significant impact on these REITs’ profitability – mortgage REITs have provided attractive yields due to cheap financing, but higher rates ahead would mean higher funding costs.
“The moral of the story here is pretty simple. Higher yields usually mean higher risk. As we’ve seen this year, risk isn’t always rewarded as there’s been a pretty sizeable shift out of riskier assets into more conservative investments,” according to a Seeking Alpha post. “But maybe another reason is that the ETF has just plain old performed lousy. The relatively high exposure to MLPs at a time when their value was tanking doesn’t help the fact that year-to-date the ETF has lagged almost every sector that it has a reasonable exposure to.”
DIV follows 50 of the highest dividend yielding equity securities in the U.S. and equally weights its component holdings. The ETF has a 0.45% expense ratio. The fund also generates a monthly dividend yield for those seeking a steady stream of income. [More Monthly Dividend ETFs]
Global X SuperDividend U.S. ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.