This year is proving to be an unexpectedly wild one for dividend investors, but the Hedged Dividend Income ETF (NYSEArca: DIVA) offers an alternative to basic dividend strategies without sacrificing income.
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 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.
Hunting For Yield
The Federal Reserve’s recent decision to keep interest rates near zero didn’t do any yield seekers any favors, especially if they’re parking capital in safe haven Treasury notes. With the search for yield still a challenge in today’s fixed income market environment, it’s important for investors to not rely heavily on dividends for income purposes.
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).
In a recent note, Jefferies said the search for yield is poised to rebound.
“The concept of an asset that can provide capital appreciation while still providing distributions above cash rates will always remain a theme for all seasons,” according to Jefferies.
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.