2023-12-13 05:46:35 ET
Summary
- Invesco KBW High Dividend Yield Financial ETF offers a 12-month distribution yield of over 11%.
- KBWD's portfolio is concentrated in the financial sector, with a significant investment in mortgage REITs and business development companies.
- KBWD's performance has been mixed compared to similar ETFs in the sector, and its high expense ratio is a major deterrent.
Investing in high-yielding financial securities has always been enticing for investors. The potential for significant monthly income is hard to pass up. But high yield often equates to high risk. The Invesco KBW High Dividend Yield Financial ETF ( KBWD ) fits into this category.
KBWD is an exchange-traded fund that began its operations in December 2010. The fund's primary objective is to mirror the performance of the KBW Nasdaq Financial Sector Dividend Yield Index, before considering fees and expenses. The ETF has 40 holdings and boasts a striking 12-month distribution yield of over 11%.
KBWD's portfolio predominantly consists of U.S.-based companies, specifically focusing on small and micro-cap stocks. The fund is managed by Invesco, an investment management company with a strong reputation in the financial industry. However, the ETF comes with a hefty total expense ratio of 3.84%, making it one of the more expensive products in the ETF universe.
Breaking Down the Holdings: The Top Five
KBWD's portfolio is concentrated primarily in the financial sector, with close to 100% of its assets invested in this sector. Top holdings include several high yielding REITs.
A Peek Into the Sector Composition
The financial sector dominates KBWD's portfolio, with mortgage REITs and capital markets holding the lion's share. The fund's significant investment in mortgage REITs and business development companies means a large part of its portfolio is in leveraged debt. The consumer finance and asset management companies round out the rest of the fund's financial holdings.
A Mortgage REIT is a type of real estate investment trust that focuses on financing for income-producing real estate. It does this through the purchase or origination of mortgages and mortgage-backed securities ((MBS)). These trusts aim to generate profit from the interest on their mortgage assets and provide mortgage credit for homeowners and businesses, thereby supplying liquidity and credit to the real estate market. They come with certain risks, including interest rate risk, credit risk, and prepayment risk, which are managed through various strategies.
I don't know about you, but holding mortgage REITs makes me nervous given higher for longer rates, and where we are in the cycle, independent of yield.
Peer Comparison: How does KBWD Fare?
When compared with similar ETFs in the sector, KBWD's performance has been mixed. The Vanguard Financials ETF ( VFH ) and Financial Select Sector SPDR ETF ( XLF ) are two prominent peers in this space. KBWD has massively underperformed traditional financials exposure despite high yield.
The Pros and Cons of Investing in KBWD
Investing in KBWD does come with its set of advantages and disadvantages. On the upside, the ETF offers an attractive dividend yield. For investors seeking steady income, this can be a significant attraction. Moreover, the fund's exclusive focus on U.S.-based companies may appeal to those looking for domestic exposure.
However, the fund's high expense ratio is a major deterrent. Moreover, the fund's heavy reliance on the financial sector, especially mortgage REITs and BDCs, exposes it to specific risks associated with these industries. In addition, the fund's performance has been lackluster when compared with its peers, which may make it less appealing to potential investors.
Final Thoughts: Should You Invest in KBWD?
While the high dividend yield of KBWD is undoubtedly appealing, it's crucial to consider the potential risks associated with this investment. The fund's heavy reliance on the financial sector, particularly in mortgage REITs and BDCs, exposes it to significant sector-specific risks. Moreover, the fund's high expense ratio may eat into the returns for investors. This is a pass for me.
For further details see:
KBWD: Not Worth The Yield