Low Yields & High Inflation Raise Profile of High-Dividend ETFs

Rising inflation and low interest rates have increased the appeal of high-yield investments, a trend that has also spilled over into Exchange Traded Funds (ETFs).


"In the last year this strategy has seen strong demand due to very low yield in the fixed income space", says Marco Montanari, Deutsche Bank's head of its ETF unit db X-trackers Asia.

According to the latest data from Blackrock, one of the world's largest exchange traded fund managers, $4.7 billion flowed into Blackrock ETFs in the first quarter from the U.S. alone and among the most popular funds was the iShares iBoxx$ High Yield Corporate Bond Fund.

Geoff Stewart, a Senior Investment Analyst at Macquarie Private Wealth says the current ETFs on offer broaden the way for investors to take positions in higher yielding assets.

Stewart looks mainly at the small, but growing Australian ETF market, and says there is a wide range of products ranging from stocks with high dividend payouts, real estate trusts to fixed income. “Each provider has a different construction methodology so it is important to know how each ETF is constructed."

The risk with high-yield stock ETFs is that higher-yielding sectors such as financials, consumer discretionary and industrials often have the biggest weighting in the basket of stocks. That's why Stewart prefers the Ishares’ S&P/ASX 200 High Dividend ETF, which puts a sector cap of 20% on its funds.

Stewart says before selecting a product, investors should look at the sector weighting in the product, and make sure that they are not taking a position too heavily weighted towards one particular sector when combined with their existing portfolio.

Deutsche Bank’s Marco Montanari says the basket of stocks in an ETF should include not just high-dividend payers, but ones that have been increasing their dividends per share. He says the firm's Global Select Dividend 100 ETF, which tracks the tracks the Dow Jones STOXX® Global 1800 Index, and is listed in Singapore, is a good example.

Only companies that have posted growth in their dividends per share over the last five years are included. The companies must also have dividends to earnings per-share ratios of less than or equal to 60 or 80 percent, depending on the region. The fund has stocks from around the globe including some traditionally high-yielding financials, utilities and telecommunication companies.

Investors who want to buy into the fixed income market can also use high-yield bond ETFs. Frank Henze, Head of SPDR Exchange Traded Funds, Asia Pacific says such products offer diversification versus buying individual high-yielding bonds.

The ABF Pan Asia Bond Index Fund ETF (2821.HK), for example, has returned an annualized rate of 7.17 percent since its inception. This ETF provides investors exposure to the local currency sovereign bonds of 8 emerging countries in Asia, including Hong Kong, China, Korea, Singapore and Malaysia.

“It is a diversified play on Asian growth trends as Asian economies are expected to outperform on a global scale,” says Henze.