SDIV - 2 Reasons SDIV Is A Sell

2023-03-24 11:32:40 ET

Summary

• SDIV is one of the highest-yielding ETFs in the market, with a strong 13.6% yield.
• I think its a yield trap.
• A look at the fund, and some of its risks and negatives, follows.

Author's note: This article was released to CEF/ETF Income Laboratory members on February 28th.

The Global X SuperDividend ETF ( SDIV ) invests in the 100 highest-yielding global equities. SDIV offers investors a strong 13.6% dividend yield and cheap valuation, but has seen consistent, significant dividend cuts and underperformance since inception. In my opinion, SDIV's drawbacks outweigh its benefits, so I would not be investing in the fund at the present time.

SDIV - Basics

• Investment Manager: Global X
• Underlying Index: Solactive Global SuperDividend Index
• Expense Ratio: 0.58%
• Dividend Yield: 13.56%

SDIV - Index and Holdings

SDIV is an equity index ETF, tracking the Solactive Global SuperDividend Index . Said index invests in the 100 highest-yielding global equities, subject to a basic set of inclusion and exclusion criteria. Stocks with yields higher than 20.0% are explicitly excluded from the index, an attempt to limit investments in yield traps and the like.

SDIV's underlying index is a bit narrower than average for a dividend ETF. As an example, the Vanguard High Dividend Yield ETF ( VYM ) and the Vanguard International High Dividend Yield ETF ( VYMI ), both invest in all U.S./international stocks with above-average yields, in the top 50% percentile (the methodology is a bit more complicated, but that's the gist of it). That is a much broader methodology, which results in larger funds, with a much greater number of holdings. VYM invests in 440 securities, VYMI in 1320, compared to 100 for SDIV. SDIV's narrower index means a smaller, less diversified portfolio, which is a negative for the fund and its shareholders.

Notwithstanding the above, SDIV is reasonably well-diversified, with the aforementioned investments in 100 holdings, and with exposure to most industries and dozens of countries. Concentration is somewhat below-average, with the fund's top ten holdings accounting for 15.0% of its portfolio, versus 20.0%-40.0% which is common for equity index ETFs.

A couple of things stand out about SDIV's holdings and exposures.

SDIV invests quite heavily in mREITs, an incredibly risky, leveraged asset class.

SDIV is overweight old-economy industries like financials and energy, due to their comparatively strong yields. The fund is significantly underweight tech, healthcare, and communications, for the opposite reasons.

SDIV invests quite heavily in the United States, due to the size of the country's economy and public equity markets. It also invests quite heavily in Brazil, due to the strong yields on offer in the country .

SDIV has above-average commodities exposure, with significant investments in materials, energy, and similar industries and equities.

Besides the above, nothing much else stands out about the fund's index or its holdings. Let's now have a look at SDIV's benefits.

SDIV - Benefits

Strong Dividend Yield

SDIV invests in the 100 highest-yielding global equities, which results in a strong 13.6% dividend yield. It is an incredibly strong yield on an absolute basis, significantly higher than average for an equities fund, and moderately higher than most of the highest-yielding asset classes today.

SDIV's dividends are mostly covered by underlying generation of income, with the fund sporting an SEC yield, a standardized measure of short-term generation of income, of 11.8%. As dividends are not fully covered, future dividend cuts are more likely than not, at least under current conditions. Dividends would likely remain strong, in the double-digits, after any such cut.

SDIV's strong 13.6% dividend yield is a significant benefit for the fund and its shareholders, and its core investment thesis.

Cheap Valuation

SDIV focuses on stocks with strong dividend yields. Yields are something of a valuation metric, so said focus should result in a portfolio with a cheap valuation, as is indeed the case. SDIV currently sports a PE ratio of 6.0x and a PB ratio of 0.7x. Both are very low figures, and lower than average for a global equities fund. For reference, the Vanguard Total World Stock ETF ( VT ), a global equities index fund, sports a PE ratio of 15.4x, PB ratio of 2.3x.

SDIV's cheap valuation could lead to significant capital gains and market-beating returns moving forward, assuming valuations normalize. Valuations have normalized for most value stocks since early 2022. Most cheaply valued funds have outperformed since, but SDIV has not , one of the few exceptions to the trend.

Notwithstanding the above, SDIV's cheap valuation could lead to significant gains moving forward. Recent results are not encouraging, however.

Although SDIV does have its benefits, it has several severe downsides. Let's have a look at these.

SDIV - Drawbacks

Declining Dividends

SDIV's dividends tend to decrease year after year, with these declining at a 4.6% CAGR for the past decade. Dividends consistently decline, with very few years of growth, and very few periods of stability. On a slightly more positive note, dividends were mostly stable in 2022, but I have no reason to believe that said stability will endure. It definitely has not done so in the past.

SDIV's declining dividends lead to steadily declining income and yield on cost for long-term investors. Shareholders might see very strong dividends for a year or two, but they tend to decrease into more moderate amounts after several years.

SDIV's dividend growth track-record compares unfavorably to that of its peers, almost all of which have seen strong dividend growth throughout the years. The gap between SDIV and its peers is substantial, and leads to incredibly weak, subpar yield on costs for SDIV's investors vis a vis most other dividend funds. Figures vary, but after five years SDIV is no longer providing significantly greater dividends than its peers, and by around seven years it is providing less.

SDIV's declining dividends are a significant negative for the fund and its shareholders, and particularly important for long-term dividend growth investors.

Although I'm not 100% certain as to why the fund's dividends are constantly decreasing, I think its underlying index is to blame. Narrow dividend-focused indexes tend to see declining dividends long-term, as these tend to overly focus on stocks with unsustainable dividends. Diversification, broad indexes, lax inclusion criteria, and strict dividend sustainability criteria help ensure long-term dividend stability and growth. Of these, SDIV does avoid stocks with yields greater than 20.0%, in an attempt to limit investments in companies with unsustainable dividends. Said policy does not seem to be working, so far at least. In my experience, stricter criteria would work, such as avoiding stocks with yields higher than 10.0%.

Disastrous Performance Track-Record

SDIV's performance track-record is nothing short of disastrous. The fund is down since inception, underperforming effectively all relevant equity indexes. Losses have been moderate, but consistent. Underperformance has been significant, generally in the double-digits.

Consistent underperformance compounds, leading to disastrous long-term performance, with a triple-digit gap performance gap between SDIV and broad global equity indexes. Performance looks quite a bit better compared to emerging market equity indexes, but the overall track-record remains mediocre.

SDIV's disastrous results were almost certainly impacted due to the aforementioned negative issues in the fund's underlying index. SDIV invests in companies with very high yields, some of which are yield traps, or excessively risky investments. These investments tend to slash their dividends to more sustainable levels, sooner or later, leading to significant capital losses and underperformance. SDIV consistently invests in these stocks, leading to subpar performance.

SDIV's disastrous results were also due to past international, value, commodities, and emerging market equity losses and underperformance. More or less none of the fund's focuses or overweight positions have performed well in the past, leading to sizable losses. SDIV's performance could improve if these segments start to perform better from here on out, but some of them have, including value and commodity stocks, and fund performance remains poor. There seem to be structural issues in the fund's index leading to underperformance, and although strong market conditions could always overcome said issues, I see no reason to think that this will be the case.

Conclusion

SDIV offers investors a strong 13.6% dividend yield and cheap valuation, but has seen consistent, significant dividend cuts and underperformance since inception. In my opinion, the negatives outweigh the positives, so I would not invest in the fund at the present time.

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