Over the past several months, equities are delivering impressive performances, but with a presidential election right around the corner, volatility could spark back up, meaning investors may want to consider protective strategies, such as the Hedged Dividend Income ETF (NYSEArca: DIVA).
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 is certainly relevant in today’s low-yield world as the AGF fund yields a stout 5.80%.
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.
Unique Way to Dividend
DIVA’s strategy offers investors a protective alternative to cap-weighted benchmarks. Part of the greater volatility associated with these large benchmarks may be attributed to their traditional market capitalization-weighted indexing methodologies where the largest and historically best performing stocks now make up huge positions in these cap-weighted indices.
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.
Making DIVA more relevant today is that rates will remain low versus their long-term average. Meanwhile, valuations of many dividend equities are above historical norms due to strong returns and asset flows as many avoid fixed income exposure over concerns of a rising interest rate environment. Given the current low-yield environment coupled with heightened equity market volatility, income-seeking investors face unprecedented challenges.
Alternative investment strategies may be a good way for investors to diversify away from traditional equity and fixed-income allocations and still maintain upside potential. Alternatives provide diversification through low to non-correlated return sources; greater risk-adjusted returns; reduced volatility and risk; hedging against rising interest rates or inflation; downside protection and capital preservation.
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.