Hunt for yield or flight to safety?
With the U.S. exchange-traded fund market approaching $4 trillion in value — a major milestone for the burgeoning industry — and fixed-income ETFs seeing increased interest from investors, some are wondering why buyers are flocking to high-dividend ETFs.
Put that action together with a low-interest-rate environment, the prospect of upcoming rate cuts by the Federal Reserve and what some see as weakening economic data, and safety starts to make sense.
But if you ask Jay Jacobs, senior vice president and head of research and strategy at Global X Funds, it's much more about yield than about portfolio protection.
"We've seen a lot of flows into our high-income alternatives," which include riskier dividend plays, Jacobs, whose firm has over $10 billion in assets under management and runs 68 ETFs, said Monday on CNBC's "ETF Edge."
"We think this movement this year, a lot of that shift in ETF assets, is looking for yield," Jacobs said. "And it makes a lot of sense when you consider the macro environment. [With] the Fed maybe, probably cutting rates two or three times this year, people really need to start to find yield again for their portfolio to reach their income targets."
Enter Global X's Superdividend ETF, ticker SDIV, and its NASDAQ 100 Covered Call ETF, ticker QYLD. Both funds use what Jacobs called "alternative" strategies to offer yields of over 9% and over 10%, respectively, to investors.
While the Superdividend ETF holds 100 of the highest-dividend-yielding stocks in the world, the Covered Call ETF uses options trading as a way to generate gains for buyers with a bigger risk appetite.
"If you look at the way that that ETF works, you're selling the upside and gaining an option premium. So, that works very well, especially in volatile markets where those options are more and more valuable," Jacobs said. "A lot of advisors, a lot of individual investors, do this themselves, but it's a challenge to roll those call options every single month. ... Global X is doing the portfolio management aspect of that."
Todd Rosenbluth, CFRA's senior director of ETF and mutual fund research, liked the broader fixed-income space as "a lower-risk way of getting diversified equity exposure."
He preferred more popular products like the SPDR S&P Dividend ETF, ticker SDY, and the ProShares S&P 500 Dividend Aristocrats ETF, ticker NOBL, both of which are selective in choosing companies that have been consistent in raising their dividends for long periods of time.
With these funds, "you get diversification across a variety of sectors," Rosenbluth said on Monday's "ETF Edge." "You are getting dividend growers, companies [whose] earnings have to be strong enough to continue to pay out the dividend. And when we at CFRA look inside that, we see a lot of compelling stocks. We see Target, T. Rowe Price — these are companies that have raised the dividend for 25-plus years that are part of both these portfolios."
All four of these high-dividend plays — SDIV, QYLD, SDY and NOBL— fell by less than 1% in Monday's trading session. NOBL is the strongest year-to-date performer, with a gain of nearly 16%.