2023-06-29 12:53:38 ET
Summary
- Global X SuperDividend ETF invests in 50 high-yield equities in the US and offers a generous 7.6% dividend yield.
- DIV has recorded disappointing risk/return performance over the past decade.
- In terms of valuation, DIV trades at attractive, below market, and value factor average P/E and P/B multiples.
Thesis
Dividend investing has somewhat fallen out of fashion over the past few years as the majority of active investors have turned to growth investing and mainly technology names. While this shift in strategy has provided some aggressive stock market run-ups and overall strong returns, it has also left some decent valuation opportunities in the dividend equities and ETFs universe, especially in high-yield.
In this analysis, I explore a relatively less know ETF, provided by Global X ETFs, the Global X SuperDividend ETF ( DIV ), in terms of its composition, valuation and performance.
Introducing Global X ETFs
The ETF providers' industry is very competitive, yet also very concentrated. In fact, the top 3 issuers (Blackrock, Vanguard and State Street) control over 70% of the market share in North America and offer almost every ETF in the top 50 list. According to Bloomberg , however, the market share they hold has receded somewhat over the past few years, giving room to more specialized/ niche issuers to increase their Assets Under Management and attract investors.
Global X ETFs, a member of Mirae Asset Financial Group, a Seoul-based global enterprise, was founded in 2008 and currently maintains around $45B of Assets Under Management. The company primarily focuses on thematic ETFs rather than broader market ones, utilizing expertise for investors looking to exploit alternative ETF strategies.
The SuperDividend ETF
The Global X SuperDividend ETF invests in 50 high-yield equities in the United States, offering a dividend yield substantially higher than what more popular dividend-focused ETFs provide. The fund charges a somewhat expensive 0.45% expense ratio, maintains around $575M of Assets Under Management and currently offers a very generous 7.6% dividend yield.
The composition of DIV is a rather interesting one, as in a world of tech-heavy broad market indices, the fund has virtually no exposure in the Technology sector. This can prove beneficial for investors from a diversification perspective, especially in the case that the tech sector was to lead the broader market to another downturn in the future.
Global X
DIV's top 10 holdings include consumer goods names like Necessity Retail, B&G Foods and Kraft Heinz, as well as companies in the financials and energy sectors like NY Community Bank and Magellan Midstream partners. The fund has a weighted-average market cap of just $25.68B, compared to an S&P 500 ETF's $560B. This shows a great emphasis on small caps that is also missing in today's mega-cap dominated market, adding to the diversification appeal of DIV.
The High-Yield Factor at an Attractive Inflection Point
Dividends have been a key component of stock market returns over more than 100 years. Over the past couple of decades, however, dividend yields have declined, due to stretched valuations and a renewed focus towards technology and other high-growth names. This has led to high-yield stocks being, on average, relatively inexpensive.
As shown in the chart below, the relative P/E of high vs. low dividend yield stocks has reached 0.5x in 2020 and remains at slightly higher levels today, close to its lowest point since the 2000 crash and the much earlier, 1980s stock market decline. For reference, the average relative P/E ratio has stood at 0.77x. This implies an over -35% valuation discount on high-dividend yield stocks.
The relative valuation trend for high-yield stocks has been on a sharp decline for the past few years, suggesting that high-yield companies offer an attractive entry point for investors. Given historical trends, the Relative P/E is likely to revert to more moderate levels, closing the potential undervaluation window for action by investors.
Peer Performance Comparison
While many dividend ETF options are available for investors, very few offer yields higher than 3.5% - 4.0%, and even fewer as high as 7.0%. In this segment, a risk/return metric analysis is presented for a peer group of high-dividend yield ETFs, with the help of Portfolio Visualizer. While the analysis does not go back too far in time, due to the limited lifetime of some of the ETFs, the backtest should provide useful insight, going back to 2016. The backtest assumes dividend reinvesting.
The risk/return performance comparison is where DIV seems to significantly lack its peers. DIV is the only ETF of the group with a negative return (-0.23% CAGR for the reference period). It also has the highest volatility (21% standard deviation) and largest max drawdown of -45.36%. In fact, in all risk and/or return metrics, DIV underperforms all of its peers.
Even on a longer-term basis, DIV's performance is very disappointing. The fund has a negative, -34.8% annualized return for the trailing 10 years. After the hit of the Covid-19 pandemic, DIV recorded a loss of over 50% and has not fully recovered since.
One of the main drawbacks of the fund leading to its poor performance, despite offering some diversification benefits, is the fact that it has no exposure to mega-cap names, especially in technology. Companies like Apple, Microsoft and Amazon have spearheaded market returns over the past few years, despite serious struggles in small and even large-cap names. Staying clear of mega-caps has been a losing game for some time now, and is likely to continue to be so.
Valuation Silver Lining
Despite the significant concerns arising for DIV's performance metrics, its valuation multiples are undoubtedly investor-friendly. More specifically, the fund trades at an 11.02x P/E and a 1.65x P/B ratio, both significantly lower than market and value factor averages.
Final Thoughts
After all things are considered, while the fund provides diversification benefits and an attractive dividend yield, its underperformance, negative returns, and absence of exposure to mega-cap names raise concerns, especially in the current market environment. Given the mixed factors surrounding the Global X SuperDividend ETF, a hold rating is advised.
For further details see:
DIV: Concerning Performance Attributes