IEF - SDIV: 12% Yield With Total Returns That Will Surprise You

2023-10-03 02:40:20 ET

Summary

• The Solactive Global SuperDividend Index includes the top 100 dividend payers globally, meeting specific criteria for inclusion.
• Dividend stability criteria are applied to screen out the weeds.
• The fund currently yields 12%.

Note that the title says it will surprise you. It did not surprise us.

The Solactive Global SuperDividend Index comprises the top 100 dividend payers from around the world. The components are equal weighted and the rebalancing is done on a quarterly basis. The companies have to meet liquidity and capitalization criteria to qualify for inclusion. To qualify, the companies have to yield greater than 6% and less than 20%, with no whispers about an imminent dividend cut. Closed end funds, partnerships, trusts and business development corporations or BDCs are excluded from the pool.

Our protagonist, Global X SuperDividend ETF ( SDIV ) is a passive entity, that aims to achieve the performance of the Solactive index that we introduced above. Since an ETF, unlike an index, has expenses, SDIV measures its returns versus the index, before expenses, which are 0.58% on an annual basis. Except for the one year period, the ETF has actually outperformed the index in all remaining time frames. That is an accomplishment of sorts.

But since SDIV is a passive ETF, its only goal is to track the index, making it at the mercy of the checks and balances employed by the index. The fund does not make any attempt to strategize to sidestep unfavorable macro conditions. It does not have a great strategy to even pick dividend winners as we shall see. Setting aside that it lost a little less money than the index, the standalone total return numbers from inception to date do not paint a pretty picture for SDIV.

It lost over 70% of its value, but its hefty yield offset a major chunk of that. Some readers may argue that very few have bought and held since inception and hence the above result does not hold true for a typical SDIV investor. Fair enough. We take to you December 2021, which is when we last covered this ETF . At that time, we had showed how SDIV lagged even the 7-10 year treasury bonds by over 35%. We argued that the future for this ETF would continue to be as unfavorable as the past, and that income investors should look elsewhere for their yield fix. Those that exited at that point avoided the negative 26.71% total returns.

SDIV had one of the poorest fundamentals amongst ETFs that we could find. The message in our article was an unequivocal "get out of dodge".

We get that investors are ready to give up some level of appreciation for a regular monthly income stream, but this level of underperformance does not remotely justify it. High yield world does have some bargains today, but it also has a lot of ticking bombs. The proof is in the pudding as far as SDIV is concerned. It has lagged 7-10 Year Treasury Bond ETF ( IEF ) since inception.

So, while the recent dividend bumps may be appealing, we would focus elsewhere on income needs.

Source: A Look At Global X SuperDividend's 9% Yield

The interest rates have undergone a sea of change since December 2021, with the underlying high dividend payers no doubt feeling the heat. SDIV made one final roar when it increased its dividends from 30 cents to 39.52 cents (split adjusted number) as the world ushered in 2022.

It has been all downhill since then, with the monthly payout now close to half of that. In terms of yield however, this ETF remains a juicy pick for the income investor.

"Aided" by the price decline, the fund actually yields higher today than what it did back in December 2021 (around 9%). This yield is even supported by the net income of the fund, reflected by the 30-Day SEC Yield number noted above. In terms of the source of this income, SDIV continues to have a chunk of its assets invested in emerging markets based on the most recently published data.

On a relatively brighter note, Brazil replaced Russia as the top emerging market holding. Financials continue to hold the top spot, with the real estate exposure declining from over 25% to under 14%.

SDIV held 103 securities at the end of last month, with the top 10 making up close to 14% of the net assets.

While this list is mostly made up of names from outside of North America, it includes a couple of names that we have covered on this platform, namely, Ready Capital Corporation ( RC ) and Global Net Lease Inc. ( GNL ).

We realize that SDIV has little to do with the geographic/sector/security selection, as it is just trying to replicate the index performance. As stated in the prospectus , "the Fund does not try to outperform the Underlying Index and does not seek temporary defensive positions when markets decline or appear overvalued". In order to make a call on the fund's future prospects, it is however, imperative to review its composition.

Verdict

In our previous piece, we had compared SDIV's total return with Vanguard High Dividend Yield ETF ( VYM ), Vanguard Real Estate ETF ( VNQ ) and iShares S&P 500 Value ETF ( IVE ) over 5 years. This ETF continues to hold the last spot in terms of total returns for the close to two years since then.

VNQ, has joined the party on the ground floor, but still managed to beat SDIV by a small margin. SDIV buys the highest-yielders and makes no attempt to understand how the yield got so high in the first place. It runs head-first into many dividend cuts. These might not happen immediately after they are added to the portfolio, but are par for the course in the minefield in which they play. It is one of the strangest strategies we have seen and we have seen quite a few strange things. We cannot wrap our head around the notion investors completely disregard the erosion in their capital, chasing these high yield funds. Blind yield chasing is bad in any climate, but more so when bottom lines are under pressure due to the higher interest rates. Even the once stable companies like W. P. Carey Inc. ( WPC ) are pulling stunts like this . Why would anyone go scouting the globe for the highest yielders is beyond us. We continue to stay out. You should consider it too.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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