Broadly speaking, it’s been some time since the financial services sector was a credible yield destination and that situation is made all the more difficult by the Federal Reserve earlier this year telling the major money center banks to pump the banks on dividend growth.
However, some financial ETFs do offer investors outsized yields. Consider the Invesco KBW High Dividend Yield Financial Portfolio (NASDAQ: KBWD).
KBWD, which turns 10 years old in December, follows the KBW Nasdaq Financial Sector Dividend Yield Index.
“The Fund generally will invest at least 90% of its total assets in the securities of publicly listed financial companies with competitive dividend yields, in the United States and that comprise the Underlying Index,” according to Invesco.
Exploring KBWD
Home to 41 stocks, KBWD is positioned as a value play because the bulk of its components are classified as value stocks. However, there are growth opportunities here because roughly 98% of the fund’s components are classified as mid- or small-cap equities.
KBWD offers investors a dividend yield that currently extends beyond 14% because it’s lineup is diverse relative to traditional, lower yielding financial services ETFs. Rather than relying solely on banks and brokers, KBWD also features insurance providers, asset managers, mortgage real estate investment trusts (mREITs) and business development companies (BDCs).
BDCs and mREITs, with few exceptions, sports significantly higher yields than standard financial services fare.
Mortgage REITs have exhibited a negative correlation to interest rates changes, especially if the yield curve flattens. Many agencies use leverage to capitalize on the arbitrage spread between short- and long-term interest rates, so companies can still make money in a rising rate environment, as long as long-term rates rise faster than the short-term rate or if the yield curve steepens.
BDCs are comprised of companies that fund small- to mid-sized private companies, which are usually rated below investment grade or not rated at all – these companies would find it harder to acquire traditional means of loans, so they turn to outside sources of capital. Since the financial crisis, regulators have clamped down on traditional lenders, making it harder for many businesses to access public capital.
BDCs act as an alternative to bank loan debt, helping smaller companies grow and profiting off the investments, which in turn would then help investors gain exposure to the growth and income potential of these privately held companies. In an expanding economic environment, BDCs should also benefit from stronger domestic businesses.
For more on innovative portfolio ideas, visit our Nasdaq Portfolio Solutions 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.