The Global X SuperDividend (yes, that is one word) U.S. ETF (NYSEARCA:DIV) is a fund that aims to provide high dividends from a basket of high-quality stocks. It tracks the “Indxx SuperDividend U.S. Low Volatility Index”. The fund’s benchmark index was something we had not come across previously and we had to look it up.

The Indxx SuperDividend® U.S. Low Volatility Index is maintained by INDXX, LLC. The Indxx SuperDividend® U.S. Low Volatility Index tracks the performance of 50 equally weighted common stocks, MLPs and REITs that rank among the highest dividend yielding equity securities in the United States, as defined by INDXX, LLC. The components of the Indxx SuperDividend® U.S. Low Volatility Index will have also paid dividends consistently over the last two years. The Indxx SuperDividend® U.S. Low Volatility Index is comprised of securities that INDXX, LLC determines to have lower relative volatility than the market. – Source: Global X ETF

The Distributions

DIV has provided a high, if rather inconsistent, distribution income. In fact the data from YCharts was so bumpy that we went to the fund’s website to double check if YCharts was pulling the correct numbers.

ChartData by YCharts

The chart above is correct. We counted 10 different monthly distribution numbers in just the last 24 months.

Source: Global X ETF

So while it is paying a high yield, it has taken a very different approach to what most investors would want in a dividend ETF.

The Setup

The fund goes off directly chasing the highest dividend-yielding securities. The counterbalance to preventing it from buying the wrong securities comes from the requirement that these securities should have paid dividends consistently over two years. While dividend aristocrats take decades to establish their reputation, DIV is using an index that sets the bar on the low side. The second offset to prevent this fund from going after the wrong companies is more interesting. It requires these shares to have a lower beta than the market.

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Source: Global X ETF

The fund has tried to blunt the problem of high-yielding stocks by screening for volatility.

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Holdings

Based on the September 30 update, the fund has definitely taken a different allocation route than the S&P 500 (SPY).

Source: Global X ETF

Notably absent from the sector allocations is Technology, which forms about 27% of the S&P 500. Also missing in action is the healthcare sector. While the former lacks dividend payers, the latter lacks the high yields the fund is looking for. We were not surprised to find a huge weighting to REITs, Utilities, MLPs and Energy here. All four are rather low weights within the S&P 500. DIV’s top 10 includes some familiar household names.

Source: Global X ETF

As we went through the list and recognized The Kraft Heinz Company (NASDAQ:KHC) and Dominion Energy Inc. (NYSE:D), it suddenly struck us. The requirement to have paid dividends pretty much is met even if the company has cut its dividends. Both KHC and D have cut dividends recently, but are still part of this index. Our point here is that the “two-year” requirement was incredibly loose to begin with and the methodology does not disqualify a company for having cut its dividends either. Another thing that struck us was that the fund’s underlying methodology must have a few more black box components. D is now yielding about 3%, and this is a rather low yield in relation to its overall yield pursuit. We are not sure how it is picking some rather low-yielding companies in this overall mix.

Performance

DIV has certainly had a tough time delivering good results. But that has not come from failing to track its benchmark at least.

Source: Global X ETF

The fund has pretty much followed its benchmark over the last few years. Since inception (2013), the fund has returned about as close to zero as one can get. Note that returns are shown from inception to October 1, 2020, below.

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ChartData by YCharts

The fund has had a rather torrid 2020 as it went into this time frame with many investments that were the most vulnerable to the pandemic. This included a few higher-risk mortgages REITs.

Source: Global X ETF Semi Annual Report

It also had 17% in the MLP sector.

Source: Global X ETF Semi Annual Report

What is notable above in both sets is that we are not seeing the sector stalwarts. Where are Enterprise Products Partners LP (NYSE:EPD) or Annaly Capital Management Inc. (NYSE:NLY)? These are the ones with the best chance of actually regaining the lost capital back and we are seeing a lot of lower-quality investments in the last semi-annual report.

Is This Just “Value” Lagging?

We are well familiar with the mean reversion game and certainly can see the appeal in not chasing indices into new highs via passive broader market ETFs. Value has lagged a lot over the last few years, so could this ETF’s lag come from that? The answer is a definite “no” on that one. DIV has lagged the iShares S&P 500 Value ETF (IVV) by a rather substantial amount as well over the last five years.

ChartData by YCharts

It has also lagged some other dividend focused ETFs like Vanguard High Dividend Yield ETF (VYM).

ChartData by YCharts

One other point we want to stress here is that even before COVID-19, the fund lagged both VYM and IVV by 30% over the previous four odd years. So while the fund was possibly the least equipped to face the pandemic, it was lagging even prior to that.

Conclusion

While we cannot say we completely understand the rationale behind the methodology, we can say that it is diving headfirst into some problematic investments. The index it follows needs to be tweaked and possibly use some tertiary screens (like debt to EBITDA). As it stands today, we do not have confidence in this ETF to provide investors with good returns. Yes, there are some sectors, like REITs, that are ripe for a rebound. But the way DIV is playing it via its two-step screening does not give us confidence in its holdings. We recommend investors look elsewhere for high yields.

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