UBS Launches Geared Dividend ETNs

UBS, the Swiss-based bank known for its private banking unit, today launched two leveraged dividend-focused ETNs, the latest to join a growing group of fund providers who have jumped into the craze for income-generating strategies.

The Etracs Monthly Pay 2x Leveraged Dow Jones Select Dividend Index ETN (DVYL - News) and the Etracs Monthly Pay 2x Leveraged S'P Dividend ETN (SDYL - News) are similar in that they both double the performance of their respective benchmarks.

DVYL will come with an “annual tracking rate” of 0.35 percent, while SDYL will cost 0.30 percent, according to fact sheets UBS circulated on Wednesday morning.

Each ETN tracks a different index that selects and allocates to securities slightly differently. And those differences could be key in determining how well they perform, as IndexUniverse’s ETF analyst Carolyn Hill pointed out in a recent blog .

Dividend-paying funds have been very popular with investors looking for the certainty of steady income in an uncertain economic environment characterized by volatile stock market action and ultra-low interest rates.

But while dividend-focused ETFs abound, their results vary widely. Some with the highest annual returns deliver some of the lowest dividend yields, putting into focus just how important security selection and weighting methodologies are, Hill noted in her blog.

Take the index underlying DVYL, for instance. It’s also used as a benchmark to the iShares Dow Jones Select Dividend ETF (DVY - News), which has seen one of the highest dividend yields in the segment at 3.49 percent, but the fund’s total return in the past year is among the lowest at just under 3 percent.

That disparity is even more evident in the S'P index underlying both UBS’ SDYL as well as State Street Global Advisors’ SPDR S'P Dividend Fund (SDY - News), which has delivered dividend yields of 3.3 percent in the same time frame, but has actually seen negative total returns of nearly three quarters of a percent.

Under-The-Hood Analysis

In the case of UBS’ new ETNs, while both DVYL and SDYL canvass the equities space for companies that have consistently increased dividends every year for a predetermined amount of time, and they both invest only in those with the highest dividend yields, their selection and weighting methodologies are different.

Both DVYL and SDYL weight securities based on their indicated annual dividend, but DVYL, which is linked to the Dow Jones U.S. Select Dividend Index, only looks back at five years’ worth of a stock’s dividend history.

By comparison, the S'P High Yield Dividend Aristocrats Index underlying SDYL goes back 25 years into a stock’s dividend performance to select its securities.

What’s more, SDYL caps a single-stock weight at 4 percent of the portfolio. At the end of April, the index benchmarking SDYL included 60 securities, with the biggest weighting 3.72 percent.

DVYL, on the other hand, caps single exposure at 10 percent of the mix. At the end of April, its benchmark comprised 100 holdings, the biggest of which weighed 3.94 percent, according to information provided by UBS in paperwork it filed with U.S. regulators.

Cash distributions will come monthly in an amount at twice the distribution of the underlying indexes. But that’s only if cash distributions are made; otherwise, there will be no monthly coupon, UBS said.

ETNs, unlike ETFs, are senior unsecured debt securities and are, therefore, subject to their issuers’ credit; in this case, UBS.


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