By Ron Rowland:
“Technology” and “Income” don’t fit like hand and glove, but a new ETF may force a change in investor perceptions. First Trust Nasdaq Technology Dividend Index Fund (TDIV - News) tries to squeeze yield from a growth-tilted sector. The company’s simultaneous launch of Multi-Asset Diversified Income Index Fund (MDIV - News) suggests First Trust sees business growth potential from yield-starved savers. Both new ETFs began trading August 14, 2012.
First Trust Nasdaq Technology Dividend Index Fund (TDIV - News) (overview) seeks to replicate the results, before ETF fees and expenses, of the NASDAQ Technology Dividend Index. The index includes U.S. listed companies in the technology and telecommunications sectors that have a dividend yield of at least 0.50%. Companies that have reduced their dividend in the last year are excluded. International stocks are eligible if they have a U.S. listing, including ADRs. The index is rebalanced quarterly and reconstituted semi-annually. Technology companies are given a target weight of 80% at each reconstitution, with the remaining 20% allocated to Telecom stocks. The index uses a modified capitalization-weighted methodology to reduce concentration.
The initial TDIV portfolio consists of 59 stocks, with the largest allocations going to QUALCOMM (QCOM) 8.0%, Microsoft (MSFT) 7.8%, Cisco (CSCO) 7.7%, International Business Machines (IBM) 7.6%, and Intel (INTC) 7.5%. By technology sub-sector, TDIV has about 28% in semiconductors, 17% in communications equipment, 14% in software, and 14% in diversified telecommunications services. The TDIV initial expense ratio is 0.5%.
Analysis/Opinion: TDIV may find an audience because many income strategies automatically omit tech stocks. However, basic information that is expected for index-based dividend ETFs (index history, yield, etc.) was not found for this ETF. One source reports an index yield of around 3% before expenses, which translates to 2.5% for the ETF. That 20% Telecom allocation is a big part of the expected dividend yield. Phone-stock yields in the 4-6% zone help outweigh more meager technology payouts.
Investors should pay attention to the weighting for a few big stocks. The top eight holdings account for half of the TDIV portfolio. Also worth noting: Apple (AAPL) is presently not eligible for TDIV’s underlying index but should be added as part of the next reconstitution.
Investors following a dividend growth strategy might be attracted to this ETF. Dividend growth within the Technology sector has averaged 16.5% annually since 2005, a much higher growth rate than any other sector. However, as stated above, much of the current yield is derived from Telecom stocks where the dividend growth rate has been about 6% annually.
Multi-Asset Diversified Income Index Fund (MDIV - News) (overview) takes an opposite course from TDIV in pursuit of yield: rather than concentrate in a sector, MDIV tries do diversify both within the stock market and across other asset classes. The underlying NASDAQ Multi-Asset Diversified Income Index allocates 25% to dividend-paying stocks, 20% to master limited partnerships (“MLPs”), 20% to real estate investment trusts, 20% in preferred stocks, and 15% in high yield corporate bonds. The bond element is achieved with the purchase of another ETF, while the other segments use individual securities – currently 124 in all. Each segment has its own eligibility criteria (details here), and the index will be rebalanced quarterly. MDIV has an “advertised” expense ratio of 0.60%.
Analysis/Opinion: MDIV is a candidate for ETF investors who want income but are not willing to shop around for it. Once again, yield and index history information was nowhere to be found, leaving potential shareholders in the dark on those subjects for now. All the major yield-producing asset classes are represented, and individual security volatility is capped at 115% of the segment’s benchmark. By keeping the MLP allocation below 25%, MDIV should avoid the dreaded C-corporation structure and associated taxes that are stinging MLP ETF owners. Convenience has a cost. For MDIV it comes via an expense ratio, which is actually 0.68% when acquired fund fees are included. Whether the results will justify the costs is yet to be seen.
MDIV will face competition from two existing products in the Asset Allocation category of the ETF Field Guide. iShares Morningstar Multi-Asset Income (IYLD - News) has a 0.60% expense ratio and a current yield of 5.3%. SPDR SSgA Multi-Asset Income Allocation (INKM - News) is an actively managed ETF with a 0.70% expense ratio and an estimated 5.5% yield.
Disclosure covering writer, editor, and publisher: Long AAPL. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.