A Dividend Strategy With Hedging Capabilities | ETF Trends

Investors looking at the benefits of equity hedges with a dividend strategy should consider 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.

Dividend yields recently surpassed those of benchmark Treasury notes for the first time since 2016, potentially providing further support for equity markets and dividend-paying stock ETFs in this prolonged low-rate environment.

DIVA follows “the INDXX Hedged Dividend Income Index, which generates a high current yield and capital appreciation with risk similar to that of a corporate bond index. The index rebalances monthly by identifying the highest-dividend stocks as long positions, and the lowest-dividend stocks as short positions,” according to Zack’s.

DIVA’s Holdings

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.

Investors have been foraging for yield the last couple of months as Treasury yields have fallen to record lows and inverted yield curves are emanating recession signals from the bond markets. However, there is still yield to be had when it comes to looking at certain corners of the market, like exchange-traded products (ETPs).

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 3.56% is nearly 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.

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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.