UBS, a leader in exchange-traded notes, recently announced two more additions to its lineup, both with a focus on the dividend space. Additionally, both of the notes look to employ a 2x leverage technique which rebalances on a monthly basis.
This monthly rebalancing strategy is in stark contrast to many other products in the leveraged space as most funds and notes rebalance on a daily basis instead. While this might not sound like a huge difference, a monthly rebalancing can often reduce much of the ‘decay’ that is inherent in leveraged products making these products arguably better choices for longer-term focused investors (see 11 Great Dividend ETFs).
Still, investors should note that when markets are moving in your favor in successive days a monthly leverage strategy can produce inferior returns to similar products that have a daily reset feature. Additionally, if an investor buys in half way during the month, they may not experience a 2x leverage factor, depending on how the product has performed since the last rebalancing time.
However, UBS clearly seems to believe that the monthly leveraged strategy is the way to go as the two latest notes in the space continue the trend for the company as of late. In fact, the firm already had a handful of products in the 2x monthly leveraged space before the recent launch including notes targeting the MLP, BDC, cloud computing, internet, and solid state drive segments.
While some of these products have failed to catch on with investors so far, a few that have a dividend focus have seen a great deal of inflows. This is especially true in the case of MLPL and BDCL which have amassed close to $125 million combined since their inceptions (also see Inside The SuperDividend ETF).
This decent level of assets—which is further exacerbated by the hefty fees that both notes charge—may be at least partially due to the enormous payouts that both of these ETNs provide investors. In fact, current dividend rates—thanks to the 2x model—come in at 10.7% for MLPL and 18.7% for BDCL.
Given the extremely low interest rate environment, these impressive payouts are worth the risk for many investors and have seen solid inflows as a result. Apparently, UBS is looking to duplicate this success with its latest launches in the dividend space, each of which we have highlighted below:
Monthly Pay 2xleveraged S&P Dividend ETN (SDYL)
This ETN looks to follow two times the monthly performance of the S&P High Yield Dividend Aristocrats Index. This benchmark consists of the 50 highest dividend yielding firms in the S&P Composite 1500 Index that have increased dividends every year for at least the past 25 years.
In other words, SDYL is going to be a monthly 2x version of the ultra popular SPDR S&P Dividend ETF (SDY). This unleveraged product has seen solid inflows, currently has nearly $9 billion in AUM and pays out a solid yield of about 3.5% (also read The Complete Guide to Preferred Stock ETF Investing).
Top holdings for the ETN’s underlying index include Pitney Bowes, AT&T and HCP, all of which account for over 3% of the note. This gives the product a tilt towards large caps, although small and mid caps do make up, respectively, 23% and 18%.
In terms of yield, the product looks to pay about 7% per annum to investors, a pretty solid level. However, costs look to be relatively low at just 30 basis points a year while investors also need to remember that the product does have the credit risk of UBS AG attached to it, although the firm is currently highly rated (read Invest Like The One Percent With These Three ETFs).
Monthly Pay 2xleveraged Dow Jones Select Dividend Index ETN (DVYL)
This new product looks to track two times the monthly performance of the Dow Jones U.S. Select Dividend Index. This benchmark screens by dividend-per-share growth rate, dividend payout percentages, and average dollar trading volume, and are then selected based on dividend yield.
Thus, the product looks to be a leveraged version of the popular iShares Dow Jones Select Dividend Index Fund (DVY). This ETF has over $10 billion in AUM, charges 40 basis points a year in fees and pays out a yield of about 3.5% (see Three Great ETFs For Your IRA).
Top holdings for this ETN’s underlying index include Lorilard, Lockheed Martin, and Chevron Corp. The note is thus exposed to mostly large caps while it also has a heavy tilt towards utilities (33%), industrials (16%), and consumer staples (16%).
In terms of yield, the note looks to pay about 7.9% per year to investors, based on the last end of month calculation. Interestingly, the annual fee comes in at just 35 basis points a year, suggesting that the product may cost less than comparable ETFs. However, much like SDYL, there is some credit risk from the underlying institution while bid ask spreads look to be higher, at least initially, in this UBS ETN.
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