Dividend stocks are a fundamental aspect of any income-focused portfolio. However, with today’s lofty equity valuations, you might want to be a little more selective when building out a portfolio.
Large-cap stocks – traditionally the mainstays of index-weighted dividend ETFs – have a robust historical track record, but innovative new approaches can help diversify your income and ensure that you don’t fall into a bear market trap.
Fortunately, a growing number of active ETFs offer alternatives to the status quo. We will dive into three relatively new ETFs, what sets them apart, and why you might want to consider them.
A High-Quality Concentrated Portfolio
The Touchstone Dividend Select ETF (DVND) invests in a concentrated portfolio of large-cap companies trading at reasonable valuations relative to their intrinsic value. In particular, the fund managers look for companies with a track record of growing dividends, sustainable competitive advantages and strong barriers to entry, including economics of scale, government barriers or high customer loyalty.
Currently, the high-conviction portfolio includes 40 to 55 stocks with a median market cap of about $126 billion, a weighted average price-earnings ratio of 16.9x and a price-book ratio of 2.4x, with the Russell 1000® Value Index as its chosen benchmark. By comparison, the S&P 500 Index has an average P/E ratio of 24.86x and a P/B ratio of 4.24x, suggesting the actively managed ETF contains more value-conscious holdings.
The fund pays quarterly cash dividends to shareholders and charges a 0.67% net expense ratio (1.41% gross expense ratio). While that’s slightly pricier than many passively managed funds, the net expense ratio is cheaper than many mutual funds and some active ETFs in the dividend space, making it a potentially attractive option for dividend diversification.
Combining Covered Calls With REITs
The SHR REIT Covered Call ETF (SRHR) invests in real estate investment trusts (REITs) focused on growing distributions over time. In addition to choosing REITs with a fundamental, bottom-up, value-driven stock selection process, the managers overlay a covered call writing strategy on the individual REITs to further boost income. The result is a high-income portfolio that produces steady and reliable cash flow over time.
Currently, the fund holds a concentrated portfolio of about 35 companies, including names like Equinix Inc. (EQIX) (13.20%), American Tower Corp. (AMT) (8.24%) and Lamar Advertising Co. (LAMR) (7.31%). Over the past couple decades, REITs like these have outperformed the S&P 500 Index while providing more safety during economic downturns. However, higher interest rates have taken a recent toll on some of these businesses.
Unlike DVND, the fund makes monthly distributions, which might be more appealing to investors relying on regular income. Meanwhile, the 0.75% expense ratio is a little higher than DVND but is in line with other covered call ETFs. As a result, you might want to take a closer look at this fund to level up your dividend income with real estate exposure.
Maximize Income With Daily Options Strategy
The R2000 Enhanced Options Income ETF (IWMY) is the first put-write ETF on the Russell 2000 using daily options to seek enhanced income for investors. Using a daily options strategy, the fund seeks to provide outsized monthly distributions to investors coupled with equity market exposure to the popular Russell 2000 Index.
The fund managers sell at-the-money and in-the-money puts on the Russell 2000 with near-term expirations. In exchange, the fund receives premium income for each put sold and a limited amount of upside appreciation up to the put’s strike price plus its intrinsic value. The goal is to achieve daily income of more than 0.25% with monthly distributions.
While IWMY doesn’t hold a conventional long stock portfolio, you still have exposure to the underlying Russell 2000® Index (up to a certain point). And the added income could make it an attractive option if you’re looking for more income than capital gains exposure. However, the expense ratio comes in at a steeper 0.99% – higher than the others on our list.
Alternatives to Consider
These are just a handful of funds that you may want to consider when boosting income in your portfolio. And, while dividend stocks are an excellent way to blend capital gains upside with income, you may also want to consider alternative income-generating options, including option-focused ETFs and commodity ETFs that leverage income-focused strategies. These funds have the added benefit of further diversifying an equity portfolio.
Option Strategy-Based Income ETFs
These ETFs are selected based on their YTD total return, which ranges from -3.6% to 30%. They have expenses between 0.35% and 0.66% and assets under management between $85M and $30B. They are currently yielding between 4.7% and 17%.
| Name | Ticker | Type | Actively Managed? | AUM | YTD Total Ret (%) | Yield (%) | Expense |
|---|---|---|---|---|---|---|---|
| JPMorgan Nasdaq Equity Premium Income ETF | JEPQ | ETF | Yes | $5.58B | 30.3% | 10.2% | 0.35% |
| Global X NASDAQ 100 Covered Call ETF | QYLD | ETF | No | $7.68B | 18.7% | 11.3% | 0.60% |
| WisdomTree PutWrite Strategy Fund | PUTW | ETF | No | $86.1M | 11.3% | 3.1% | 0.44% |
| Global X S&P 500 Covered Call ETF | XYLD | ETF | No | $2.85B | 7.1% | 8.2% | 0.60% |
| JPMorgan Equity Premium Income ETF | JEPI | ETF | Yes | $29.2B | 6.1% | 7.9% | 0.35% |
| Amplify CWP Enhanced Dividend Income ETF | DIVO | ETF | Yes | $2.88B | 1.6% | 4.7% | 0.55% |
| Global X Russell 2000 Covered Call ETF | RYLD | ETF | No | $1.5B | -3.1% | 12.1% | 0.66% |
| iShares 20+ Year Treasury Bond BuyWrite Strategy ETF | TLTW | ETF | No | $654M | -3.6% | 17.2% | 0.35% |
Commodity Income ETFs
These ETFs are selected based on their YTD total return, which ranges from -2.8% to 19.5%. They have expenses between 0.43% and 0.95% and assets under management between $28M and $7.1B. They are currently yielding between 3% and 31%.
| Name | Ticker | Type | Actively Managed? | AUM | YTD Total Ret (%) | Yield (%) | Expense |
|---|---|---|---|---|---|---|---|
| Alerian MLP ETF | AMLP | ETF | No | $7.07B | 19.4% | 8.2% | 0.85% |
| iShares Commodity Curve Carry Strategy ETF | CCRV | ETF | No | $28M | 8% | 30.8% | 0.43% |
| KraneShares Global Carbon Strategy ETF | KRBN | ETF | Yes | $487M | 5% | 27.66% | 0.79% |
| Direxion Auspice Broad Commodity Strategy ETF | COM | ETF | Yes | $294M | 0.3% | 4.4% | 0.81% |
| First Trust Global Tactical Commodity Strategy Fund | FTGC | ETF | Yes | $2.69B | -2.4% | 3.2% | 0.95% |
| Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF | PDBC | ETF | Yes | $5.62B | -2.8% | 13.4% | 0.64% |
When choosing between different options, you should always look beyond the dividend yield or income potential, and consider each fund’s capital gains performance and expenses. It’s also critical to ensure that the fund fits within your larger portfolio from a diversification standpoint.
The Bottom Line
Are you concerned about stretched equity valuations impacting your income portfolio?
DVND, SRHR and IWMY are three relatively new ETFs that income investors may want to consider for their portfolios. With today’s stretched equity valuations, they offer potential diversification away from the familiar large-cap stocks underlying many of the most popular dividend ETFs using market cap-weighted indexes.
In addition to these relatively new launches, you may also want to consider option- and commodity-focused funds that can help diversify any income-oriented portfolio.