VT - SDIV: Navigating The Dividend Dilemma In A Volatile Market

2023-06-14 13:47:26 ET

Summary

• SDIV has underperformed this year, with a negative correlation to the Vanguard Total World Equity Fund.
• The ETF's strategy focuses on cyclical sectors and has high exposure to emerging markets, making it a risky play in the current economic climate.
• Despite low valuations, the high allocation to cyclical stocks may reflect a value trap rather than a value investment.

Investment Thesis

The Global X SuperDividend ETF (SDIV) has experienced a poor performance this year, on the back of a correlation flip with the World Equity index. As some investors are anticipating a bounce from current levels, caution is advised as SDIV's strategy of high dividend-paying stocks may be a value trap rather than a value investment. With a heavy allocation to cyclical sectors and emerging market countries, SDIV's performance is tied to economic cycles and carries higher risk in today's volatile market. Furthermore, the fund's valuation metrics appear cheap on the surface, but may be skewed due to the cyclical stock allocation. Overall, bearish sentiment in emerging markets and a lack of capital flows to these countries could hinder SDIV's future returns.

About SDIV

SDIV is designed to provide investors with exposure to high dividend-paying stocks from around the world. The fund's strategy revolves around seeking out companies that have a track record of consistently paying high dividends, aiming to capture attractive income opportunities. SDIV's holdings span various sectors and countries, including both developed and emerging markets.

Investors can utilize SDIV as part of their portfolio to potentially enhance income generation and diversify their holdings. The fund's focus on dividend-paying stocks can be particularly appealing for income-oriented investors seeking a steady stream of cash flow.

It's important to note that SDIV carries certain considerations. The fund's emphasis on high dividend-paying stocks may expose investors to value traps or companies with unsustainable dividend levels. Additionally, SDIV's performance can be influenced by global economic conditions and market fluctuations. Investors should carefully evaluate their investment goals and risk tolerance before incorporating SDIV into their portfolios. For more details on SDIV, please check the fund's prospectus .

SDIV, Value Investment, Or Value Trap?

SDIV has performed poorly year to date, with a nearly 8% decline since January 1st. What's even more interesting is the reversal in the correlation between this fund and the Vanguard Total World Stock Index Fund ETF Shares (VT) that started in Q4 2022. This is quite unusual considering the positive correlations observed over the past five years, indicating a shift in dynamics. I believe the gap between the two funds will eventually narrow, either through a decrease in VO or an increase in SDIV. Given SDIV's current battered state, it wouldn't surprise me to see a rally over the summer. With recent market resilience and numerous investors seeking the attractive ~12% distribution yield offered by SDIV, there is potential for upward momentum. However, it's crucial to note that the fund's fundamentals are weak, as its strategy focuses on high dividend-paying stocks that often turn out to be value traps rather than value investments.

Additionally, it's important to consider the cyclical nature of SDIV. With over 60% of assets allocated to cyclical sectors such as financials, energy, and real estate, the fund's performance is heavily influenced by economic cycles. Given higher interest rates in the US, Europe, and Emerging Markets (with the exception of China), and an inverted yield curve in many of these countries, financials and real estate stocks will have a hard time rallying in my opinion, while Energy has been a laggard so far this year .

We can also note a very low allocation to sectors that have high growth and high ROI potential, such as technology. While I don't have any particular issue with cyclical stocks, I don't think this strategy is suitable for the buy-and-hold type of investor. Furthermore, the current market environment suggests that we are more likely to face a period of slow/negative growth ahead, making SDIV a high-risk investment for those chasing the double-digit dividend yield given the exposure to cyclical sectors. Cyclical stocks have been great investments coming out of recessions when growth starts picking up, and not the other way around.

Unsurprisingly, SDIV has a significant allocation to emerging market countries, which generally offer higher dividend yields due to increased risk. While I have a bullish outlook on Brazil within this list thanks to their disciplined approach to monetary policy and low stock valuations , I hold skepticism towards China/Hong Kong (where growth failed to match expectations after reopening) and South Africa, which together represent a fifth of the portfolio. Additionally, I'm not particularly optimistic about the US, which accounts for around 31% of total assets. Considering the recent rally in US stocks since the October lows, high valuations, and signs of an economic cooldown, I believe caution is warranted.

Although SDIV appears attractive in terms of valuations, it's important to recognize that the high allocation to cyclical stocks skews the valuation metrics. Cyclical stocks tend to appear cheap at market peaks and excessively expensive at market bottoms. Even if valuations are indeed low, I don't believe it is a strong catalyst to drive SDIV's performance higher. With bearish sentiment prevailing in emerging markets and capital flows favoring the US and Europe, the lack of inflows poses a potential drag on SDIV's returns in the foreseeable future. Similarly, a reversal of flows could help break the negative trend, but we're not there yet.

Key Takeaways

The performance of SDIV has been lackluster this year, influenced by a reversal in correlation with the World Equity Index. While some investors anticipate a potential rebound, it's important to exercise caution due to the possibility that SDIV's focus on high dividend-paying stocks could be a value trap rather than a sound investment. With a significant allocation to cyclical sectors and emerging market countries, SDIV's performance is closely tied to economic cycles and carries elevated risk in the current volatile market environment. Moreover, the fund's seemingly inexpensive valuation metrics may be distorted by its exposure to cyclical stocks. Overall, pessimistic sentiment in emerging markets and a lack of capital inflows to these regions may impede SDIV's future returns.

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