FMD Capital Management

An Interesting Alternative To Boring International Dividend ETFs

Written by Michael Fabian, May 09th, 2013

I have always been intrigued with the niche’ market that Guggenheim has carved out for itself in the ETF universe. I remember sitting across from a wholesaler a few years ago listening to a presentation on the BulletShare concept. The well thought out argument was a pitch to free investors from the intricacies of managing an individual corporate, or high yield bond portfolio. Although they have had limited success with asset inflows into the strategy in comparison to the larger aggregate bond ETFs, I can appreciate the existence of a fund designed to target a specified maturity and sector of the bond market.

A Guggenheim ETF I use more frequently in our strategic income strategy, the Guggenheim Multi-Asset Income ETF (CVY), is another well thought out alternative ETF for income investors. I particularly like it’s non-traditional index composition that includes higher yielding, more aggressive securities than your typical run of the mill large-cap dividend equity ETF such as the iShares Select Dividend (DVY). It essentially enables investors to gather exposure to various alternative income sectors such as REITs, MLPS, closed-end funds, and preferred stocks, in addition to great companies like Intel (INTC), Verizon Communications (VZ), and Pfizer (PFE). I prefer using a fund like CVY as a sector allocation during a strong uptrend, as I believe it offers a great opportunity for performance and yield enhancement through an alternative means of diversification.

So as my interest began to shift abroad towards companies with lower fundamental valuations and higher yields, the Guggenheim Global Dividend Opportunities Index (LVL) went hand in glove with that theme. Although I don’t have a position established in the fund today, its yield is what caught my eye as I was browsing Guggenheim’s website. Every single one of the 100 holdings that comprise the index was selected and then weighted based on the size of its dividend, and in fact the current SEC yield is indicated at 5.20%. The composition of the fund allows investors to gain access to mREITs, business development companies, and other specialized high income producers, but with the majority of the holdings allocated globally and therefore outside the U.S. Dollar.

Moreover, It is important to keep in mind the fund is heavily concentrated with higher yielding sectors such as financial, telecom, and utilities stocks, so it won’t offer the same amount of broad diversification as a typical international ETF. This intensification has likely caused LVL to underperform some of its peers in the past, but it will be interesting to see how it reacts during the next correction. With that in mind, it may be in your best interest to integrate a position like LVL into your portfolio as a sector allocation similar to CVY, rather than as a core holding. I will continue to monitor its performance vs other great international dividend equity ETFs, but I think it could represent another great future opportunity given the right circumstances.