Domestic dividends continue growing and many investors continue favoring dividend stocks and exchange traded funds, but while dividend payers are historically defensive, there is still equity risk associated with the asset class.
The Hedged Dividend Income ETF (NYSEArca: DIVA) is an ETF that can help reduce some of the equity risk that comes with dividend investing. 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, which debuted over four years ago, aims to deliver a risk profile that is comparable to investing in high-grade corporate bonds.
DIVA’s underlying index “invests in stocks with stable or growing dividends that trade at high yields; to reduce risk the Index shorts stocks in each sector which have unstable or low dividends,” according to Bloomberg.
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.
DIVA ETF Due Diligence
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 volatility of equity markets.
DIVA’s standard deviation of 7.50% is well below what investors will find on traditional equity benchmarks, like the S&P 500 or Russell 1000, but its 30-day SEC yield of 4.10% is more than double the S&P 500’s dividend yield.
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.
DIVA’s top long sector weights include energy, financial services, real estate and utilities.
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