ETFs
The Downsides of Holding the World’s Most Profitable ETFs
Sure, ETFs can give you broad, low-cost access to stock indices, such as the S&P 500 or FTSE 100, but they can also give you exposure to certain types of stocks. If you’re looking for income, for example, ETFs can give you access to a group of stocks with dividend Yields. By selecting the fixed-income equity class, often marked “dis” for distribution, you can have dividends paid directly into your investment account, rather than reinvesting them. Here’s a look at some of the most attractive funds and what you should know if you’re considering getting involved.
Here are some of the ones that catch your eye.
Using data provider Morningstar, I found eight ETFs that return more than 5% without using leverage. I found six others that are yielding more than 4%. For reference, the FTSE 100 index – one of the world’s highest-yielding indices, thanks to its concentration in cash-rich resources, tobacco and financial companies – is currently yielding just 3.8%.
The most profitable ETFs use rules to select only high-yielding stocks. The top is the ETF Stoxx Global Div100 Swp 1J GBP from Xtrackers with a yield of 7.6%, according to Morningstar. This ETF, which charges 0.5% annual fees, selects the 100 most profitable companies in developed markets worldwide. It holds companies ranging from the United Kingdom HSBC Holdings And Legal & General Group to the minor Yancoal Australia and developer Henderson Land Development Corporation.
The yield is also above 7%. ETF iShares EM Dividends USD Distwhich, for a relatively high fee of 0.65%, will allow you to hold the most profitable emerging market stocks, such as Brazilian Petroleum, VedantaAnd Bank of China. There is also the iShares Asia Pacific Div Exchange Traded Fund And WisdomTree Emergng Markets Equity Income ETFwhich return 5.4% and 5.1% respectively, by investing in the most profitable stocks in their respective markets.
THE ETF iShares UK Dividends GBP Dist takes a similar approach: investing in the 50 most profitable UK stocks, including HSBC, Imperial Marks, Vodafone GroupAnd Rio Tinto registered sharesThe strategy invests a third of its assets in financial companies, such as banks and insurers.
While most of the ETFs on the list focus exclusively on high dividends, some hold stocks that pay reliable and growing dividends. This is to avoid the trap of holding stocks that have fallen significantly in value due to the company’s struggles, which pushes up the dividend yield since it is calculated by taking the last 12 months of dividends per share and dividing the result by the share price (and then multiplying by 100). It is important to remember that a drop in the share price can suggest that future dividends will be cut. It is also important to keep in mind that high yields do not mean higher than market returns from a total return perspective, i.e. when capital and income are combined.
A few more: the ETF SPDR S&P EmMks Dividend Aristocrats yields 4.4% and only holds emerging market stocks that have increased or maintained their dividends for five or more consecutive years. The Xtrackers Euro Stoxx Quality Dividend ETF (DXSA) and ETF Franklin European Quality Div UCITS yield of around 5% and companies with high and persistent dividends in Europe. ETF Invesco EURO STOXX Hi Div Low Vol GBP is another great choice if you’re looking for stable returns. It holds 75 European stocks ranked by their 12-month historical dividend yield and 12-month historical dividend yield. volatility (starting with the least volatile).
Here’s how to decide if it’s worth it.
It is important to understand why yields are high. Dividend yields are the product of the dividend paid by a company, but also the share price. So a high yield may be the result of a struggling industry or sector rather than a healthy company that is returning a lot of money to shareholders.
I mean, look, the total returns – which include capital gains and dividends reinvested over five years – have been pretty disappointing for some of these ETFs. The iShares EM Dividend UCITS ETF has been pretty flat over five years, as has the iShares Euro Dividend Ucits ETF. The iShares Asia Pacific Dividend ETF, on the other hand, has only increased 7% over that entire period.
However, high dividend yields can help smooth out returns for investors, as they are likely to get a fixed amount of income per year, which could increase over time. inflation if companies make more money.
Among the best performing stocks, based on five-year total return, were the Franklin European Quality Dividend UCITS ETF (up 40%), the WisdomTree Europe SmallCap Div UCITS ETF (up 35%) and the iShares UK Dividend Ucits ETF (up 32%). These trackers show that high dividends do not always come at the expense of capital returns.
Alex Watts, Investment Data Analyst at interactive investoralso points out that high yields won’t necessarily be sustainable. So when looking for high-yielding companies, be sure to look for balance sheets that are strong enough to be able to support (or grow) those payments over time.
Watts, however, emphasizes the long-term value of dividend reinvestment. A regular dividend can provide a steady stream of income that could potentially grow over time, in addition to any profits from a company’s stock price appreciation. And over time, stable dividends can provide a buffer against market declines.
Watts is a fan of two low-yielding ETFs.
The first, with a yield of around 4%, is the ETF SPDR® S&P Global Div Aristocrats GBP. It aims to track the performance of high dividend companies around the world. But they must also have maintained or increased their dividends for the past ten consecutive years, while posting positive returns on equity and cash flow. Rather than weighting stocks by company size, they are weighted by dividend amount, leading to a significantly different composition than a conventional global index.
For example, the fund has a larger than benchmark weighting in utilities (26.6%), financials (25.6%) and real estate (11%), while it is lighter than the benchmark in technology (2.4%) and healthcare (3.1%). And it is more heavily weighted toward mid-caps overall, with mid-caps accounting for about 40% of the portfolio, about double what you would see in the traditional MSCI World Index. That heavy focus on mid-caps and value companies has been a bit of a drag last year and so far this year, but its defensive plays have paid off in 2022.
The fund offers significant diversification with around 100 stocks. Its annual fee of 0.45% is in line with its peers.
Watts’ second choice is broader and less stylistically differentiated – the ETF Vanguard FTSE AllWld HiDivYld USDAcc GBPIt offers a yield of just over 3% and holds around 1,880 large and mid-cap stocks from the FTSE All-World index, but only includes stocks with above-average dividend yields. The fund excludes companies that are not expected to pay dividends in the next 12 months and ranks the rest by their dividend yield.
And with an annual fee of just 0.29%, it’s one of the cheapest global equity income ETFs.