Global economic uncertainty coupled with a persistent low interest rate environment may push investors towards riskier investments in search of a better yield. Those investors may now be discovering the hard way the risks that come with chasing those yields.
Two areas that investors may have gone yield reaching are REITs and MLPs. REITs haven’t done too poorly this year as those higher yields have kept these ETFs roughly on pace with the S&P 500 but those who went into MLPs have gotten hammered. The ALPS Alerian MLP ETF (AMLP) is down almost 20% year-to-date and the underlying Alerian MLP Index is down almost 30%.
Global X launched the SuperDividend group of ETFs with the intention of appealing to the high dividend seeking crowd. The Global X SuperDividend ETF (SDIV) was launched just a couple of years ago and had done pretty well through the middle of 2014. Since then, the fund has lost about 14% of its value and was down as much as 20% at the end of September.
The SuperDividend ETF can chalk up its troubles to a number of issues.
Weakness in the global macroeconomic environment has taken its toll on the fund’s ⅔ allocation to international stocks. While the ETF has limited exposure to political hotbeds like China and Brazil, it does have significant exposure to Europe which is struggling to maintain a recovery in the eurozone. Its large position in Australia which has lost about 10% this year has also affected the fund’s returns. The strong dollar has also weakened returns from overseas.
The fund has also leaned heavily on interest rate sensitive sectors like financials, real estate and utilities to achieve its yield. As mentioned previously, REITs have held up well but utilities and financials have struggled as the Fed has maintained its zero rate policy until it sees further signs of economic growth.
But maybe the ETF has just plain old performed lousy? The year-to-date performance of the ETF has lagged almost every sector and market cap that it has a reasonable exposure to.
It’s understandable that investors may search for ways to improve the middling yields they’ve seen on bank products and Treasuries but one of the principles of finance is that the chance to obtain higher returns comes with taking on additional risk and sometimes that risk doesn’t pay off. Some investors may be learning that rule firsthand.