UBS, the Swiss-based bank known for its private banking unit,
today launched two leveraged dividend-focused ETNs, the latest to
join a growing group of fund providers who have jumped into the
craze for income-generating strategies.
The Etracs Monthly Pay 2x Leveraged Dow Jones Select Dividend
Index ETN (NYSEArca:DVYL) and the Etracs Monthly Pay 2x Leveraged
S&P Dividend ETN (NYSEArca:SDYL) are similar in that they both
double the performance of their respective benchmarks.
DVYL will come with an "annual tracking rate" of 0.35 percent,
while SDYL will cost 0.30 percent, according to fact sheets UBS
circulated on Wednesday morning.
Each ETN tracks a different index that selects and allocates to
securities slightly differently. And those differences could be key
in determining how well they perform, as IndexUniverse's ETF
analyst Carolyn Hill pointed out in a recent blog.
Dividend-paying funds have been very popular with investors
looking for the certainty of steady income in an uncertain economic
environment characterized by volatile stock market action and
ultra-low interest rates.
But while dividend-focused ETFs abound, their results vary
widely. Some with the highest annual returns deliver some of the
lowest dividend yields, putting into focus just how important
security selection and weighting methodologies are, Hill noted in
Take the index underlying DVYL, for instance. It's also used as
a benchmark to the iShares Dow Jones Select Dividend ETF
(NYSEArca:DVY), which has seen one of the highest dividend yields
in the segment at 3.49 percent, but the fund's total return in the
past year is among the lowest at just under 3 percent.
That disparity is even more evident in the S&P index
underlying both UBS' SDYL as well as State Street Global Advisors'
SPDR S&P Dividend Fund (NYSEArca:SDY), which has delivered
dividend yields of 3.3 percent in the same time frame, but has
actually seen negative total returns of nearly three quarters of a
In the case of UBS' new ETNs, while both DVYL and SDYL canvass
the equities space for companies that have consistently increased
dividends every year for a predetermined amount of time, and they
both invest only in those with the highest dividend yields, their
selection and weighting methodologies are different.
Both DVYL and SDYL weight securities based on their indicated
annual dividend, but DVYL, which is linked to the Dow Jones U.S.
Select Dividend Index, only looks back at five years' worth of a
stock's dividend history.
By comparison, the S&P High Yield Dividend Aristocrats Index
underlying SDYL goes back 25 years into a stock's dividend
performance to select its securities.
What's more, SDYL caps a single-stock weight at 4 percent of the
portfolio. At the end of April, the index benchmarking SDYL
included 60 securities, with the biggest weighting 3.72
DVYL, on the other hand, caps single exposure at 10 percent of
the mix. At the end of April, its benchmark comprised 100 holdings,
the biggest of which weighed 3.94 percent, according to information
provided by UBS in paperwork it filed with U.S. regulators.
Cash distributions will come monthly in an amount at twice the
distribution of the underlying indexes. But that's only if cash
distributions are made; otherwise, there will be no monthly coupon,
ETNs, unlike ETFs, are senior unsecured debt securities and are,
therefore, subject to their issuers' credit; in this case, UBS.
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