2024-01-17 06:21:33 ET
Summary
- QDPL invests in S&P 500 holdings and dividend futures.
- The fund provides investors with moderate upside potential and a strong 6.3% yield.
- An overview of the fund follows.
The Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF (QDPL) invests in the underlying holdings of the S&P 500 and dividend futures. Equities provide potentially strong capital gains, futures provide strong distributions, with the fund currently yielding 6.3%. Although I don't think there is anything wrong with the fund, it has somewhat underperformed expectations, and I see few reasons to invest in dividend futures. As such, I would not invest in QDPL.
QDPL - Overview & Analysis
Strategy and Holdings
QDPL invests around 88% of its assets in the underlying holdings of the S&P 500, the remainder in dividend futures which entitle the fund to 4x the dividends of said index, at a cost. QDPL has a simple infographic.
QDPL is mostly a simple S&P 500 index fund, so long-term returns and performance should be quite similar to that of said index. QDPL has almost perfectly matched the performance of the index since inception. The graph is uncanny.
QDPL's dividend futures account for a lower percentage of the fund's holdings or expected returns but are its key differentiating factor. I have a longer explanation of these futures here , but I'll include a shorter one in this article.
QDPL's dividend futures are derivatives contracts linked to the value of the S&P 500 Dividend Points Index (Annual) . Said index measures the dividends paid by S&P 500 constituents YTD for the specified date. As an example, as of January 16th, S&P 500 constituents have paid $4.64 in dividends, and so the index has a value of $4.64.
S&P
QDPL's dividend futures are benchmarked to the index above and are settled for cash on the 3rd Friday of December of the appropriate year. The fund is generally invested in futures of the current year, and the two next ones.
In the 3rd Friday of December 2024, the fund will receive cash equaling 4x S&P 500 dividend payments for the year. In practice, most futures get closed or rolled over a few days prior to this, for a very similar amount to their cash settlement.
Before said date, dividend futures prices might differ from those of its index for several reasons, including market expectations of future dividends, sentiment, positioning, and other market conditions. As an example, the futures above currently trade with a price of $70 - $71, even though the index currently stands at only $4.6.
QDPL - Table by Author
Said gap is almost entirely due to expectations of upcoming dividend payments. Investors are pretty certain that S&P 500 companies will make hefty dividend payments this year and are pricing dividend futures accordingly. For reference, historical S&P 500 dividends.
Multpl
Prices are also impacted by broader market conditions. As an example, 2024 futures decreased in price in late 2022, even though dividends were growing reasonably rapid as said year. In my opinion, and based on prior research , said drop was mostly due to bearish market sentiment and higher interest rates (prices have to drop until expected returns equal t-bills yields of +5.0%). Some of QDPL's futures saw lower prices in late 2022, as expected.
At maturity, profits are equal to S&P 500 dividends minus futures prices. As an example, for the 2024 futures, profits should equal 2024 dividends (TBD) minus $71.35 (check the table several paragraphs above). Same idea for future years. Strong dividend growth should lead to strong dividend futures profits, and vice versa.
Futures are generally leveraged, as investors can get a lot of exposure with only a little bit of collateral. QDPL aims for zero net leverage at the fund level, by somewhat reducing its equity exposure and investing in t-bills instead. QDPL generally invests around 12% of its holdings in t-bills which, by my calculations, does result in zero net leverage.
QDPL - To Buy Or Not To Buy
Some contexts first.
I started writing this article because a subscriber mentioned QDPL as paying 4x the dividends of the S&P 500 while capturing around 88% of its upside. QDPL implies something similar in their infographic:
Although the above is accurate, the fund does yield around 4x the S&P 500 and has 88% exposure to said index, I don't believe it gives the costs and volatility associated with dividend futures the importance they deserve. These matter, and strongly impact the performance of the fund, generally in a negative way.
As an example, the fund saw capital gains of 15.7% in 2023, compared to 24.3% for the S&P 500. Capital gains equaled 64.6% those of the index, quite a bit lower than 88%. Total returns were around 3.3% lower than 88% of S&P 500 capital gains plus 4x its dividends (23.7% versus 27.0%).
As another example, QDPL saw higher capital losses than the S&P 500 in 2022, even though it has lower exposure to said index. It did outperform on a total return basis, due to the dividends.
Data by YCharts
Similar results since inception, with QPDL share prices down 4.5% even though the S&P 500 is up 9.1%.
As should be clear from the above, QDPL somewhat underperformed (naive) expectations. In my opinion and experience, this was due to the costs and volatility associated with dividend futures.
As further evidence of the above, a few years ago I wrote about the US Equity Cumulative Dividends Fund-Series 2027 (NYSEARCA: IDIV ), which was a pure dividend futures ETF. Said fund saw losses of almost 20% from late 2021 to late 2022, even though dividends and dividend growth were both positive for said time period. Other factors matter too, sometimes more than the dividends themselves.
IDIV Previous Article
Circling back to QDPL, I would be bullish if the fund's total returns equaled something like 88% S&P 500 capital gains and 4x its dividends. It has not, so I am not.
On a more personal note, I felt very conflicted when deciding on a final rating for QDPL. In my opinion, the issues above are not significant negatives, definitely not significant enough to warrant a sell rating. The dividend futures seem fine, and do provide good distributions. Returns seem fine as well. At the end of the day, QDPL is mostly a simple S&P 500 index fund, so unless you are bearish on equities, anything less than a hold seems unwarranted.
I settled on a hold for QDPL for two reasons.
First, because it has underperformed relative to what I expected, and relative to what I believe some readers and subscribers expected. I can't be the only one disappointed when seeing this:
QDPL
and then this:
Second, because the fund's performance has been functionally identical to that of investing in an S&P 500 index fund and withdrawing 5.0% per year.
QDPL's capital gains are around 5.0% lower than those of the S&P 500 per year, see above. QDPL's dividend yield is around 5.0% higher than that of the S&P 500. Overall, investing in QDPL is roughly equivalent to investing in the S&P 500, selling 5.0% of your portfolio every year, and calling the proceeds a dividend.
Now mind you, this isn't what QDPL is doing, and there is absolutely nothing wrong with any of the above. Still, you can achieve the same results by investing in the S&P 500 and withdrawing 5.0% per year and save yourself 0.79% in expenses. Doing so gets you a bit more exposure to S&P 500 share prices, a bit less exposure to S&P 500 dividend growth, with a tiny, uncertain impact on total returns.
Conclusion
QDPL invests in the underlying holdings of the S&P 500 and dividend futures. Although I don't think there is anything significantly wrong with the fund, I see few reasons to invest in dividend futures, so I would not be investing in QDPL.
For further details see:
QDPL: S&P 500 And Dividend Futures ETF, Not Quite What I Expected