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Best of Both Worlds With This Dividend ETF

Two of the most prominent themes in the world of exchange traded funds this year have been the resurgence of dividend funds and investors’ devotion to low volatility products. Some ETFs marry those two themes, including the Compass EMP US EQ Income 100 Enhanced Volatility Weighted Index ETF (CDC) .

CDC, which debuted nearly two years, has quietly amassed over $108 million in assets under management. More importantly, CDC is up nearly 6% year-to-date, a performance that trumps the S&P 500 and some other, larger dividend ETFs.

CDC tracks the CEMP U.S. Large Cap High Dividend 100 Long/Cash Volatility Weighted Index, a passive index that is comprised of the ” highest dividend yielding stocks of the CEMP U.S. Large Cap 500 Volatility Weighted Index,” according to Compass.

What makes CDC unique among volatility ETFs is how the fund mitigates volatility. That strategy includes the ability to move to cash during turbulent market environments. CDC can move to 75% cash its underlying index experiences an 8% drop from its highest daily value .

An important lesson in evaluating low volatility ETFs is to start by realizing that just because two funds purport to offer reduced volatility, that does not mean they are identical twins. Some of the largest low volatility ETFs prove as much and some rookie funds are offering new spins on the “low vol” phenomenon.

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CDC’s equity “selection constitutes a strategic beta approach, which is basically any special filtering, screening or factoring process designed to improve a fund’s ability to outperform the overall market. Utilities are the most heavily represented sector in the fund, accounting for 24% of the portfolio, followed by financial stocks at 19% and consumer cyclicals at 15%. The top three portfolio holdings are the Coca-Cola Company (KO), AT&T Inc. (NYSE: T) and American Financial Group Inc. (AFG). The annual portfolio turnover ratio is 17% ,” according to Investopedia.

The Federal Reserve is doing scores of dividend stocks, exchange traded funds and other income-generating asset classes a good turn this year by delaying another interest rate increase. Providing an added boost to dividend ETFs is the utilities sector, which for most of this year, has been a stalwart performer.

Investors looking for income beyond bonds often turn to dividend stocks and ETFs. Potential investors should be aware the tax consequences as well. Dividends are passed through to ETF investors and may be taxed as qualified and ordinary income. The providers will publish the percentage of dividends paid that were qualified at the end of the year. ETFs that rebalance semi-annually or annually will lower the chance of non-qualified dividends.

CDC “suits investors seeking a dividend focus, and who also prefer the fund’s strategic beta indexing attempt to outperform the overall equity market,” adds Investopedia.

Click here to read more ETF news, strategy and commentary on ETF Trends.

Compass EMP US EQ Income 100 Enhanced Volatility Weighted Index ETF

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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