Income-minded investors can turn to an innovative exchange traded fund strategy that may help enhance yield generation by up to 4X the S&P 500 dividend yield with modestly lower exposure to the broader equities market. In recent webcast, Is Your Client Getting Enough Yield?
Sean O’Hara, President, Pacer ETFs Distributors; and Richard P. Silva Jr., CIO and Head of Trading, Metaurus Advisors, warned that the traditional reasons to use fixed income have been eroded as yields are at all-time lows, correlation is higher, and many are now exposed to rising rate risks.
“With yields so low, the risk-return relationship is backwards,” O’Hara said. “There’s only about 1% of room for interest rates to go down, and they can absolutely go up.”
O’Hara highlights the fact that the Federal Reserve has more or less exhausted its toolkit with interest rates already at historical near-zero lows. Consequently, traditional fixed income investors are now exposed to greater interest rate risk as rates are likely to tick higher.
Meanwhile, O’Hara pointed out that investors have increasingly turned to equities as a source of yield generation.
“Equities are now providing over half of a standard portfolio’s income. And even then, income overall has been declining,” O’Hara added.
Alternatively, investors can look to two new unique, dividend-focused ETFs that are now available on the New York Stock Exchange. The first fund is the Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF (QDPL), which seeks to provide cash distributions equal to 400% of the S&P 500 dividend yield in exchange for modestly lower exposure to the price return performance of the S&P 500. The second, the Pacer Metaurus US Large Cap Dividend Multiplier 300 ETF (TRPL), seeks to provide cash distributions equal to 300% of the S&P 500 dividend yield in exchange for modestly lower exposure to the price return performance of the S&P 500.
The Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF separates the S&P 500 into its two return components: Dividend Cash Flow and Price Appreciation/Depreciation. The fund then reduces equity exposure to S&P 500 Index at approximately 88% and uses the remaining percentage to purchase dividend futures for 4x greater participation in dividends. Lastly, the strategy recombines the components into new ratios to produce an S&P 500 exposure with 4x dividend yield and approximately 88% S&P 500 Index exposure.
The Pacer Metaurus US Large Cap Dividend Multiplier 300 ETF also separates the S&P 500 into its two return components: Dividend Cash Flow and Price Appreciation/Depreciation. Additionally, it reduces equity exposure to S&P 500 Index at approximately 92% and use the remaining percentage to purchase dividend futures for 3x greater participation in dividends. The ETF then recombines the components into new ratios to produce an S&P 500 exposure with 3x dividend yield and approximately 92% S&P 500 Index exposure.
The Dividend Component consists of annual futures contracts whose value represents the market’s expectation of the amount of ordinary dividends to be paid by S&P 500 companies during the term of the futures contract. S&P Dividend Futures seek to allow investors in these instruments to obtain exposure to the actual dividend value that will be paid by the S&P 500 constituent companies over a period of time.
Dividend futures prices consistently trade at a discount to analyst dividend forecasts. This difference between dividend futures prices and analyst dividend forecasts is a measure of the Dividend Risk Premium, which is a return premium in excess of the risk-free rate that investors demand to compensate them for the risk that the market’s expectation of dividends will come to be realized.
The dividend multiplier strategies offer no upside cap, provide a traditional 60/40 tax percentage, come with no call threats, and reduce S&P 500 downside risk.
Financial advisors who are interested in learning more about this dividend strategy can watch the webcast here on demand.