Bet on Rising Dividends With This Financial ETF - ETF News And Commentary
May 06 2013 - 7:48AM
Zacks
As a majority of the companies finish reporting their quarterly
financial results, it becomes a known fact that they have had a
tough time increasing or even maintaining their revenues although
profits more or less seem to be well aligned with market
expectations.
While financial sector earnings have not been as good as in some
of the previous quarters, the drag has mainly been a result of
tough comparisons. Nevertheless, the financial sector has been
delivering a decent earnings and revenue growth. Some of the
noteworthy reasons are – marked decrease in provisioning for losses
for banks and increasing fees for investment management firms.
Mutual Funds and ETFs have witnessed massive inflows and
increased trading activities facilitated by a surging equity
market, which have increased the brokerage fees for brokerage firms
(see Are Low Volatility ETFs Capable of Big Gains?).
The impressive increase in earnings over the past few quarters
has caused many of the companies from the financial sector to
announce an increase in their dividends. Not only will this make
financial stocks more attractive but it will also quench the
dividend thirst for income seeking investors.
For investors seeking an exchange traded fund route to play the
dividend paying financial equities the Powershares KBW High
Dividend Yield Financial ETF
(KBWD) would be an
interesting choice.
KBWD was launched in December of 2010 and since then has been
able to amass an asset base of around $244 million. The ETF follows
a unique investment strategy and weighs its components, comprising
of financial stocks, on the basis of their dividend yields.
Its portfolio comprises of approximately 37 stocks with just
about 46% of its total assets invested in the top 10 holdings. One
other noteworthy fact for KBWD is that it is mostly exposed to mid
and small cap stocks as opposed to other mainstream financial
sector ETFs which bet on the large cap ones.
At the first instance it might appear that a mid and small cap
focused ETF might be more volatile compared to an ETF which
concentrates on large caps, however this is not the case with KBWD.
In fact KBWD has a three year annualized volatility of just 18.04%.
Compared to this the Financial Select Sector SPDR (XLF) has a three
year annualized standard deviation of 25.06% (see Time to Buy This
Low Risk Retail ETF?).
This is primarily due to the fact that KBWD does not focus
primarily on growth oriented stocks contrary to its financial
sector counterpart XLF. Also, accounting for its relative capital
market stability is the fact that it has a predominant exposure to
dividend paying stocks which have low historical volatility
measures.
Still, by no means does it imply that the ETF lags behind its
other growth oriented counterparts. In fact a comparison of KBWD
and XLF over a period of 3 years reveals that the dividend focused
ETF has pretty much always been ahead of the growth oriented one as
far as total returns are concerned (read What Does Your Income ETF
Focus On?).
The following chart reveals the cumulative total returns between
the two financial ETFs since the inception of KBWD back in December
of 2010.
Chart 1: Comparative Total Returns
Analysis
![](http://staticzacks.net/images/zacks/blogs/1367857260_scaled_425.jpg)
Notice how KBWD returns line has mostly been above the XLF
returns line. Within this time frame, KBWD has returned almost 33%
compared to XLF which returned 23.50%.
Thus, it is witnessed that even for a high volatility sector
such as the financial sector, the low volatility ETF has
outperformed the high volatility ETF in a slightly longer term
picture.
The dividend yield for KBWD stands at an astounding 7.61%, but
sadly investors have to pay a huge premium for the ETF in the form
of the expense ratio which stands at 148 basis points. This is
without doubt one of the most important factors which could
restrict investors from owning this ETF.
Bottom Line
In the current low rate environment , any investment avenue
which yields more than the benchmark rates is considered to be an
attractive option. Considering this backdrop, KBWD fits the bill
like no other ETF. However, investors have for long abstained from
investing in financial stocks for dividends primarily due to the
higher volatility attached with them (see Healthcare ETF in Focus
on Earnings Reports).
However, we have already seen the risk-return tradeoff for this
exciting ETF, which is pretty much in alignment with the risk
tolerance of an income seeking investor. Moreover, with most of the
financial companies increasing the dividends, now might well
be the time to gain exposure in this exciting financial ETF.
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SPDR-FINL SELS (XLF): ETF Research Reports
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