FTHI - QDPL: Multiplying The S&P 500 Dividend By 4 With Little Tradeoff

2023-09-27 10:10:05 ET

Summary

• Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF aims to provide exposure to the S&P 500 Index with a 400% dividend multiplier.
• The fund holds S&P 500 Annual Dividend Index Futures for about 15% of its asset value, but it is not leveraged.
• QDPL is likely to outperform covered call ETFs in a strong bullish trend and outperform the S&P 500 in a bear market.

QDPL strategy and portfolio

Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF (QDPL) is a dividend fund launched on 7/12/21 to track the Metaurus US Large Cap Dividend Multiplier Index Series 400. It aims at providing an exposure to the S&P 500 Index of approximately 88% in value and 400% in dividends. In short, it multiplies dividends by 4 and slightly reduces capital gains and losses. The fund has an expense ratio of 0.79% and a 12-month yield of 6.5%. Distributions are paid quarterly.

As of writing, the portfolio is composed of:

• 86.8% of stocks, with the same components and proportions as any S&P 500 ETF ( SPY , VOO , IVV , SPLG ),
• 8.9% of short-term treasuries,
• 4.3% of cash and equivalents

The sum is already 100%, but that's not all. Treasuries and cash are used as collateral to hold S&P 500 Dividend Futures for a value of 15.5% of the fund's net asset value. It looks like a moderate 1.15 leveraging factor including futures value, but in fact the fund itself is not leveraged and doesn't have the risks, costs and behavior of a leveraged ETF. It has the risks and costs of any fund holding future contracts, especially those related to liquidity and roll yield, but they are limited to 15% of assets. Annual dividend futures are divided in three equal parts on the current year and the next two years. As a result, one third of futures value must be rolled once a year. It means only 5% of the fund's asset value is subject to risks and costs of rolling futures every year.

The equity part, which is about 87% of the portfolio now, has the same sector breakdown, holdings and relative weights as SPY (except possible minor tracking errors).

Fast facts on dividend futures

As described by CME Group ,

Equity Index Dividend futures provide you with efficient tools to hedge or express a view on the U.S. dividend market, regardless of the price movement of the benchmark indices. Quarterly and annual contracts are available on the S&P 500 Index. Annual contracts are available on the Nasdaq-100 and Russell 2000 Indices.

QDPL holds S&P 500 Annual Dividend Index Futures, which are based on the S&P 500 Dividend Points Index and expire on the third Friday of December of the contract year. As described in QDPL prospectus, this is also the fund's rebalancing date. One contract is worth $250 multiplied by the underlying index value. The CME ticker is SDAZn, "n" being a digit representing the year. The fund currently holds SDAZ3, SDAZ4 and SDAZ5. In December 2023, SDAZ3 will be rolled to SDAZ6. If the current term structure persists, it may be a good deal: SDAZ6 is cheaper now (futures are in backwardation on 3 forward years, as plotted on the next chart). However, the curve slope may change and be in contango in December, which would result in a decay. Once again, it would apply to only 5% of the fund's asset value.

Historical performance

The next chart compares total returns since inception of QDPL, SPY and five ETFs magnifying dividends of the S&P 500 with option strategies (covered calls):

• JPMorgan Equity Premium Income ETF ( JEPI ),
• Global X S&P 500 Covered Call ETF ( XYLD ),
• Global X S&P 500 Covered Call & Growth ETF ( XYLG ),
• Invesco S&P 500 BuyWrite ETF ( PBP ),
• First Trust BuyWrite Income ETF ( FTHI ).

On this time interval, FTHI has performed the best, followed by JEPI. The rest of the pack, including QDPL, is in a narrow range. However, it was a sideways market and these funds may perform differently in other conditions. All of them boost dividends with derivatives, but QDPL is closer to a plain vanilla S&P 500 ETF, and it may perform better in a bullish trend. Moreover, its behavior is more predictable. First, because the strategy is not path-dependent, unlike buy-write strategies. Second, because dividend futures don't cap capital gains, unlike covered calls. Third, because futures price is independent of volatility, unlike options. On the downside, QDPL dividend yield is capped and can't profit from the tailwind of a well-executed option strategy in favorable market conditions. XYLD, FTHI and JEPI currently feature trailing 12-month yields over 9%.

Takeaway

Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF is designed to provide an exposure to the S&P 500 Index of about 88% in value and 400% in dividend. For this purpose, it holds S&P 500 Annual Dividend Futures for a value of about 15% of assets. It is not leveraged, and risks of decay related to futures are limited. QDPL behavior is more predictable than covered call ETFs, which is rather a good point for price and a limitation for yield. QDPL would likely outperform covered call ETFs and underperform the S&P 500 in a strong bullish trend, and underperform covered call ETFs but outperform the S&P 500 in a bear market. However, price history is too short to assess the strategy.

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