By Michael Johnston:
UBS continues to develop a suite of exchange-traded notes that appeal to yield-focused investors, recently expanding its lineup with a pair of ETNs that offer monthly leveraged exposure to dividend-paying stocks. Both of the new ETNs will be linked to indexes that currently serve as the basis for extremely popular dividend ETFs; the new UBS notes will amplify both the price swings and yields delivered by those benchmarks. The new ETNs are:
- ETRACS Monthly Pay 2xLeveraged Dow Jones Select Dividend Index ETN (NYSEArca:DVYL - News)
- ETRACS Monthly Pay 2xLeveraged S&P Dividend ETN (NYSEArca:SDYL - News)
Under The Hood
DVYL will seek to deliver monthly results that correspond to 2x the change in the Dow Jones Select Dividend Index. That benchmark, which is already linked to the iShares Dow Jones Select Dividend Index Fund (NYSEArca:DVY - News). That index screens potential components by dividend-per-share growth rate, dividend payout percentage, and average daily trading volume. Individual stock components are selected based on dividend yield [see also Dividend ETF Special: 25 Equity ETFs With Attractive Distribution Yields].
Currently, DVY’s top components include Lorillard, Lockheed Martin, and Kimberly-Clark. DVY has a 30-day SEC yield and distribution yield of about 3.5%. DVY has about $10 billion in assets, making it one of the largest and most popular of the more than four dozen dividend ETFs out there.
Recently, 2x the yield on the underlying index came to about 7.9%. DVYL will charge an annual tracking fee of 0.35%. That actually makes it cheaper than DVY, which charges 0.40% in annual expenses.
SDYL is linked to the S&P High Yield Dividend Aristocrats Index; that benchmark currently serves as the basis for the SPDR S&P Dividend ETF (NYSEArca:SDY - News), which has nearly $9 billion in assets. The Aristocrats index consists of companies that have increased dividends every year for the past 25 years. That’s a pretty exclusive club, especially after the recent recession cut into the payouts of many blue chip firms. Currently, components of SDY include AT&T, Pitney Bowes, and Kimberly-Clark [see also Six Juicy High Yield Bond ETFs For 2012].
Twice the yield on the underlying index of SDYL is approximately 7%. The new ETN will charge an annual tracking fee of 0.30%. Again, that makes the 2x leveraged ETN from UBS cheaper than the “plain vanilla” ETF linked to the same underlying index; SDY charges 0.35% in annual fees.
Monthly Leverage In Focus
The new UBS ETNs will offer amplified exposure to these benchmarks, resetting the effective leverage (200%) on a monthly basis. That makes these ETNs unique from many of the leveraged exchange-traded products that seek to capture daily leverage over the course of a single trading period. The target 2x multiple of SDYV and DVYL will vary over the course of the month as the underlying index changes; if the underlying index climbs, the effective multiple will generally decrease slightly (and vice versa). Monthly leveraged ETNs are still subject to the impacts of compounding, which can work for or against investors. But because the reset of leverage occurs on a monthly basis as opposed to a daily basis, the impact of this phenomenon is reduced [see also Inside The 8x Leveraged ETN].
While monthly leverage obviously leads to increased risk and volatility, it also has the potential to deliver substantial current returns. The yields on the new ETNs are currently in the neighborhood of 7%.
UBS had previously launched a handful of monthly leveraged ETNs targeting high yielding asset classes, including real estate (:RWXL), Business Development Companies (:BDCL), and MLPs (:MLPL). In addition to UBS, PowerShares and Deutsche Bank have teamed up on a number of ETPs that offer monthly leveraged exposure to benchmarks comprised of commodity futures contracts.
Disclosure: No positions at time of writing.
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