Are Dividend ETFs a Better Play in Sideways Markets?

China’s equity markets has become a top locale for dividend-focused investors, with heavyweights like BlackRock and Vanguard among their ranks. Those who are looking for more yield-generating opportunities can also turn to international dividend exchange traded funds.

The Shanghai Stock Exchange Dividend Index, which tracks 50 of its top-paying companies, has generated a 12.6% return this year compared to the benchmark index’s 3.8% gain, South China Morning Post reports.

As major onshore investment banks are divided over the second half outlook due to concerns about earnings slowdown, dwindling liquidity, and faster inflation, many are looking at dividend plays to generate some extra returns.

“We recommend allocations into high-dividend stocks on the lack of capital flows and risk appetite in the short term,” Tang Jun, an analyst at Zhongtai Securities, told the South China Morning Post. “There will be no clear-cut opportunity in the market for now while trading will be light.”

BlackRock, the world’s biggest money manager, and U.S. peers like Vanguard and Invesco, are among those with exposure to some of the biggest constituents in the Dividend Index.

“Against the backdrop of policy tightening expectations, there’s a big chance that trading will continue to concentrate on stocks with stable outlooks and high dividends,” Qu Yiping, an analyst at Shengang Securities, told the South China Morning Post.

Founder Securities pointed out that dividend-rich companies have historically been a great play during sideways-trading market conditions since the strategy produced above-average returns within at least a year in the aftermath of the 2015 market crash and the pullback in 2018, when the trade war and the deleveraging campaign weighed on the stock market.

“Dividend-rich stocks have a high safety margin,” Li Lifeng, a strategist at Huaxi Securities, told the South China Morning Post. “When the market progresses to a stage where earnings will be the key focus, investors can enjoy not only increasing returns from dividend payouts but also additional upside from valuation expansion.”

An actively managed Asia-Pacific region dividend exchange traded fund could help income-minded investors diversify with international market exposure. Specifically, the SmartETFs Asia Pacific Dividend Builder (NYSE Arca: ADIV) is an active dividend strategy focused on investing in high-quality, dividend-growth stocks of mature companies in the Asia-Pacific region. ADIV generally holds 35 approximately equally-weighted positions. The SmartETFs Asia Pacific Dividend Builder targets consistent high return on capital as opposed to focusing solely on the highest yielding dividend payers. The strategy is managed by Edmund Harriss.

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