Many income-starved investors have turned to dividend stocks as bond alternatives. Exchange-traded products (ETPs) focused on dividends have rushed to meet this demand….
We detail the money flows, country and sector compositions, and most widely held stocks of this group of funds. Highlights include:
– Dividend ETPs have gathered $87 billion in assets, accounting for 5.7% of total global equity ETP assets.
– The number of dividend ETPs has grown 75% since 2010, outpacing growth in fixed income ETPs and the total ETP market.
– Dividend ETP flows closely track ETPs specialising in investment grade bonds–and tend to move inversely with flows into cyclical stocks.
– Funds vary greatly in industry sector exposure and yield because of differences in methodologies and selection criteria.
– US stocks dominate the holdings of the top 14 divided ETPs with an 82% share.
– The top 25 stocks held by dividend ETPs make up 30% of total assets.
– Stock concentration within industry sectors is relatively high, with the top five stocks making up 65% of energy holdings of dividend ETPs.
Overall industry inflows fell to $29.6 billion in the second quarter–down from a record first-quarter total of $69.7 billion and the lowest since the first quarter of 2010. Equities attracted a net $44.2 billion of inflows, led by funds focused on US and Japanese stocks.
Bond funds had inflows of $6.2 billion, the lowest in 10 quarters. The commodity rout accelerated, with gold ETP s hemorrhaging $19.1 billion–more than twice the previous quarter’s record outflow.
BlackRock collects and analyses industry wide data of roughly 5,000 ETPs globally in monthly ETP Landscape reports.
Investors poured $56.4 billion into developed market equity ETPs–near record first-quarter levels. Funds focused on North American funds made up the bulk of inflows with a 59% share. Japan funds attracted a record quarterly $18 billion on expectations of monetary stimulus and structural reforms. The Bank of Japan lent a helping hand; it reported buying $3.6 billion of Japan ETP s in the second quarter under its asset purchase programme. Europe-focused funds attracted a scant $630 million.
Investors yanked money from emerging market funds five straight months in a row. Expectations of a ‘tapering’ in the US Federal Reserve’s bond buying, slowing growth in China and fears of an emerging market funding crisis gave investors pause. Outflows totalled $12.2 billion. The lion’s share (around 92%) was from broad emerging market funds.
Fixed income ETP s attracted $6.2 billion–the slowest rate since the fourth quarter of 2010. The ‘great rotation’ into equities has not arrived yet–but it is real within fixed income. Inflation-protected bond ETPs had record outflows of $3.4 billion as inflation fears subsided. US core consumer prices in June rose at the slowest pace in two years. High yield funds lost a record $2.1 billion and emerging market debt lost a record $1.2 billion.
News the Fed could start to wind down its bond buying programme led to a stampede into short-term bonds, which are less vulnerable to rate rises than longer-dated securities. Flows into short maturity funds (three years and less) accelerated to a record $13.6 billion. Intermediate, long-term and broad maturity bond ETP s recorded outflows of $7.4 billion.
Gold funds saw six straight months of outflows, with a record $19.1 billion in the second quarter alone. The gold price tumbled 23% over the quarter as declining inflation expectations and the prospect of an end to quantitative easing sparked an investor exodus. Broad funds, silver and other commodities all recorded outflows.
ETPs remain big players in gold markets. The industry’s assets totalled $78.6 billion at the end of June, equivalent to 66 million troy ounces of gold. That compares with global gold production of 87 million troy ounces in 2012, according to the US Geological Survey.
Only the Fed, Germany’s Bundesbank, the International Monetary Fund (IMF), and the central banks of France and Italy hold more of the precious metal, according to Bloomberg and IMF data.
Global dividend ETP s, which focus on dividend-paying equities, held a total of $87 billion at the quarter’s end. This equalled 5.7% of total equity ETP assets, compared with just 2.9% in 2010. The number of dividend ETP s was 166 at the end of the second quarter–up 75% from 2010. This outpaced a 57% jump in fixed income ETP s and 37% overall industry growth.
US-focused funds dominate, with around 70% of the dividend total–dwarfing Europe’s meager share of just 3.4%.
Dividend ETP s have made up the bulk of the flows into European equity funds in 2013, although the totals are modest. Emerging markets are relatively small players in the dividend ETP world–but attracted net inflows in 2013 even as the overall category bled.
Fixed income substitutes
Flows into dividend ETPs, which tend to be treated as bond substitutes by many investors, can be heavily influenced by government and monetary policies. The sector’s outflows in November and December of 2012 illustrate the point. Fears were growing about the US ‘fiscal cliff’–and the prospect of higher dividend taxes
for wealthy US investors.
The world (and dividend investors) survived the cliff.
Inflows resumed in 2013 after a mild increase in dividend taxes for the wealthy. Net purchases slowed down again in June. The reason? Fed Chairman Ben Bernanke’s signal that the central bank may ‘taper’ its bond purchases led to a spike in interest rates. This triggered outflows from utilities, property equities, preferred stock and other crowded income plays.
Dividend funds actually still managed net inflows of $677 million in June.
Strong flows into dividend ETP s over the past three years have roughly tracked the decline in US Treasury yields to a record low of 1.44% in 2012. It is not a perfect relationship, but big yield declines typically were followed by increasing inflows. Similarly, backups in yields such as in the latter half of 2010, slowed flows (but did not kill them).
Paltry bond yields have pushed investors into bond alternatives such as dividend ETP s. Bonds pay fixed coupons, but equities offer the prospect of rising dividend payments (as well as capital appreciation) as companies increase earnings–but with the risk of capital losses.
Bondification of equities
Money flows into dividend ETP s tend to move inversely with those into ETP s specialising in cyclical sectors such as materials, energy and financials. Dividend stocks are regarded as defensives, and typically outperform cyclicals in periods of sluggish economic growth.
Today, many defensive stocks (including dividend payers such as utilities) are at historic peaks in profitability and valuation. At these lofty levels, defensives may not provide the downside protection investors have come to expect (this year’s selloffs in utilities and property securities attest to this). We recommend slowly shifting out of crowded income plays and into cyclicals, as detailed in Exit, Entry and Overshoot of June 2013.
Record low yields have led to the bondification of the equity market. Investors are buying quality companies with predictable earnings and dividend income. The result: flows into dividend ETP s are closely tracking flows into global investment grade (IG) bond funds. Perhaps counterintuitively, flows into IG funds have been even more volatile than those into dividend funds. The sectors are similar in asset size, number of funds (121 IG bond funds versus 166 dividend funds) and geographical focus (US securities dominate).
Dividend ETP s come in many flavours. The average dividend yield is 3.3% (weighted by assets under management), compared with 2.6% for the MSC I World Index and 2.1% for the S&P 500. The averages mask significant variations. These stem from differing methodologies for selecting dividend stocks,
benchmark indexes and regional focuses of funds.
Yields range from 2.1% to 6.6% in the 14 largest dividend ETP s globally (accounting for around 75% of assets).
Peek under the hood, and the composition of dividend ETPs looks quite different from broad equity indexes. Staples, industrials, financials and utilities are among the heaviest weighted sectors. The biggest differences with standard indexes are in technology and utilities holdings. Even these sector averages mask an incredible variety of weightings between different ETP s. For example, the weight of financials in the top 14 dividend ETP s varies from zero to 52.6%. Utilities exposure ranges from 1.2% to 30.4%.
Why such huge variation between funds? The answer: there is no single benchmark. Some funds focus on companies that have a long history (think decades) of consistently increasing dividends. This rules out technology companies such as Microsoft (first dividend in 2003) or Apple (recently announced its first dividend since 1995). Other funds focus on higher-than-average dividend payers–while adding ‘smart rules’ to screen out companies likely to halt dividend payments in the near term. Others still concentrate on dividend stocks in certain market segments such as small caps–or regions such as emerging markets.
The top 14 dividend ETP s hold more than 1,400 different equities. The top 25 companies held by dividend ETPs account for around 30% of total holdings. The top 50 stocks account for 44% of holdings, while the top 100 make up 62%.
Stock concentration varies greatly across industry sectors.
For example, the top five stocks in the utilities sector make up just 17.5% of total utilities holdings across dividend ETP s.
The top five energy stocks, by contrast, make up 65% of that sector’s assets, thanks to the high weight of behemoth dividend payers such as Chevron and Exxon Mobil. This is a similar story to emerging market ETP s, where stock concentration tends to be high in many sectors.
Source: ETFWorld.ch – BlackRock