SDIV - SDIV: Don't Make The Mistake To Own This 14.8% Yielding ETF

2023-03-29 09:43:02 ET

Summary

• The Global X SuperDividend ETF offers an eye-popping 14.8% yield.
• However, the ETF’s portfolio consists primarily of high risk securities in the mortgage trust market, which suggests that dividend cuts could negatively affect NAV performance and distributions.
• SDIV’s long-term NAV history is poor.

The Global X SuperDividend ETF ( SDIV ) stands out in a crowded market for exchange-traded funds, or ETFs, with a staggering 14.8% dividend yield.

With inflation hovering around 6%, many investors are still concerned about the rise in consumer prices and are turning to ETFs such as the Global X SuperDividend ETF to combat it.

However, given the ETF's concentration in high-risk securities and industries vulnerable to interest-rate hikes, I believe investors should consider another exchange-traded fund to combat inflation and generate monthly dividend income.

Inflation Is Moderating, But It Is Still A Risk

According to the most recent inflation report for February, inflation has dropped to 6%. While the inflation rate is down by about one third since June, which is when inflation peaked at 9.1%, inflation is still a concern for many passive income investors.

Since SDIV throws off a 14.8% yield, buying the high yield ETF could be tempting to passive income investors for obvious reasons.

Superficially speaking, investors could buy SDIV, beat out inflation and gain another 7% or 8% on top that could be used for either consumption or reinvestment.

SVID’s Portfolio Consists Of High-Risk Equities And Has Sector Concentration Risk

The top holdings of the exchange-traded fund are primarily higher risk domestic and international equities. Mortgage trusts such as PennyMac Mortgage Investment Trust ( PMT ) or New York Mortgage Trust ( NYMT ) , healthcare REITs such as Omega Healthcare Investors Inc. ( OHI ) , and container shipping and logistics company Orient Overseas International Ltd. are among these holdings. These stocks are also at a higher-than-average risk of dividend cuts if the Fed continues to raise interest rates.

As I explained in the case of Annaly Capital Management, Inc. ( NLY ) , mortgage trusts are very sensitive to interest rate hikes because their leverage businesses rely on low funding costs. As a result, all mortgage trusts have seen declining net interest margins and increasing pressure on their net asset values.

The Global X SuperDividend ETF also has a high sector concentration risk, with financials and real estate accounting for 47.2% of investment exposure. If the central bank continues to raise interest rates or the U.S. banking crisis worsens, SDIV's net asset value could suffer significantly.

SDIV’s NAV Record Is Poor, Don’t Be Seduced By The High Yield

ETFs with high dividend yields, such as the Global X SuperDividend ETF, do not always have the best net asset value records. This is clearly the case for SDIV, as the fund's net asset value has consistently and over a long period of time declined.

The net asset value of the fund as of March 23, 2023 was $22.23, representing a 64% decrease since March 23, 2018. The NAV record alone makes a strong case against SDIV, and when making an investment decision, passive income investors must consider both the NAV trajectory and the high dividend yield.

The JPMorgan Equity Premium Income ETF ( JEPI ) is an actively-managed, low-cost exchange-traded fund that also pays a monthly dividend to passive income investors as an alternative to the Global X SuperDividend ETF.

The dividend yield on JEPI is currently 12.0%, and because the fund's portfolio is largely made up of high-quality stocks that are part of the S&P 500, such as AbbVie Inc. ( ABBV ) , Exxon Mobil Corporation ( XOM ) , or The Coca-Cola Company ( KO ) , the risk of significant net asset value declines is much lower, in my view, than in the case of the Global X SuperDividend ETF. I recently covered JEPI and provided a comprehensive overview of the benefits that the exchange-traded fund provides.

Why The Global X SuperDividend ETF Could See A Lower Valuation

The Global X SuperDividend ETF's biggest risk, in my opinion, is that its portfolio is primarily comprised of securities in the financial and mortgage sectors.

Given that many high yield securities frequently have to reduce their dividends, I believe the ETF's net asset value is particularly vulnerable as interest rates rise and the central bank must contend with inflation.

Rising interest rates raise funding costs for most businesses, but especially mortgage real estate investment trusts, or REITs, which use borrowed funds to purchase securities. As a result, in a rising-rate environment, many of SVID's core holdings face lower net interest margins and NAV pressure.

My Conclusion

Passive income investors concerned about inflation should reconsider purchasing the Global X SuperDividend ETF.

Because the fund's holdings are primarily in high-risk financials and mortgage trusts, the portfolio's net asset value is vulnerable. Mortgage trusts are feeling pressure on their bottom lines as the Fed raises interest rates, reducing their net interest margins.

As a result, I don't think SDIV's distributions or NAV are particularly stable.

JEPI, on the other hand, focuses on high-quality S&P 500 stocks. Considering SDIV's poor net asset value track record, purchasing SDIV for its 14.8% yield should be strongly discouraged.

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