Investors looking for that alluring combination of a noteworthy yield and defensive posturing may want to consider the Hedged Dividend Income ETF (NYSEArca: DIVA).
Not only does DIVA sport a dividend yield of 3.54%, or triple that of the S&P 500, but the fund offers downside protection, too.
DIVA tracks the INDXX Hedged Dividend Income Index, which is designed to deliver to investors a strong current yield capital appreciation potential with a risk profile similar to a corporate bond index, according to AGFIQ.
DIVA also employs a long/short strategy to take advantage of some of the volatility associated with low or volatile dividends. The fund “provides 100% long exposure to stocks with stable or growing dividends that trade at high yields and 50% short exposure to stocks with unstable or low dividends,” according to the issuer.
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During periods of market selling in traditional assets, these types of liquid alternative strategies can experience lower drawdowns or even positive returns, which may help buoy an investment portfolio during troubled times.
Nevertheless, potential investors should be aware that these types of investments are not meant as growth strategies to generate outsized returns in investment portfolios. In reality, these strategies are doing exactly what they were made for diminishing volatility.
DIVA holds 100 equally weighted securities within the universe of the largest 1,000 US stocks that have paid consistent or growing dividends and which have the highest dividend yields. Additionally, the fund shorts approximately 150 to 200 stocks, within the same universe, that have the lowest-to-no dividend history and low yields. Due to its indexing methodology, investors may find higher yields than dividend stocks while potentially hedging against the volatility of equity markets.
DIVA looks for stable or growing dividends and looks for the highest yield among the 1,000 largest names in the U.S. The portfolio then limits sector weights and equally weights components to avoid concentration risks. Furthermore, the ETF shorts stocks with low yields to hedge equity and sector risks as a way to diminish overall portfolio volatility and preserve the dividend yield of long securities.
Advisors wouldn’t necessarily overweight alternative strategies in their investment portfolios, but they would add a small portion into these products, capitalizing on factors like diversification, low correlation, enhanced risk-adjusted profile, absolute returns, poor bond market outlook, investments that clients wouldn’t find themselves and enhanced yield.
For more on alternative strategies, please visit our Alternatives Channel.
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.