Analyse: db x-trackers Stoxx Global Select Dividend 100 ETF

During the financial crisis many firms which were traditionally big dividend payers--in particular banks--had to cut their payouts and saw their share prices fall as investors fled to safe-havens. However, cost-cutting exercises left many companies with huge cash reserves which are now being returned to investors, in some cases even topping pre-crisis dividend payout levels. In particular, the utilities sector--representing 19% of the index’s value--often attracts investors because it has historically produced strong, stable cash flows and dividends.

As of 24 of July 2012 the fund had a dividend yield of 3.4%. In contrast, the dividend yield for the MSCI World Index was 2.0%. We see this ETF as suitable for investors with a favourable outlook on the global economy and in particular for those pursuing an income-enhancing strategy.

Because this fund’s benchmark index weights constituents by dividend yield, not by market capitalisation, investors won’t necessarily find the largest and most stable companies among its top holdings. The largest component stock of the STOXX Global Select Dividend 100 Index is Annaly Capital Management, representing 2.2% of the index’s value. Suntec Real Estate (2.1%) and Rsa Insurance Group (1.9%) complete the top three holdings. By way of comparison, Suntec Real Estate is not even a component of the MSCI World Index.

Fundamentale Analyse

Dividends play an important role in an equity portfolio as they account for a large portion of long-term stock returns. Over the last decade, the STOXX Global Select Dividend 100 NR Index returned an annualised 6.9%, almost three times the 2.4% annualised return of the STOXX Global Select Dividend 100 PR Index; highlighting the importance of dividends in equity returns.

The latest US unemployment and consumer spending data have added some positive tone to the economic outlook. Unemployment dropped to 7.8% in September, its lowest level since January 2009, the US Federal Reserve has stated its belief that the weakness in the job market in the second quarter may have been just temporary and the latest data indicate a return to more normal levels of economic growth. However, the uncertain economic outlook has kept businesses from hiring more staff or making new investments.

Lower unemployment coupled with rising consumer spending, which accounts for roughly two-thirds of US GDP, should support the economic recovery in the coming months. However, in a worst case scenario the looming “fiscal cliff” which could be reached at the end of the year poses additional risks. Tax increases and spending cuts could cost the average family thousands of dollars per year, according to the Wall Street Journal. A more likely scenario is simply the expiration of the payroll tax holiday, which would cut average take-home pay by around $1,000 a year.

In Europe, the UK--the second largest country in the index--posted stronger-than-expected GDP growth of 1.0% for the third quarter of the year; putting an end to three consecutive quarters of contraction. However, the economy benefited from one-off events like the Olympic Games; suggesting that the recovery is not as strong as the headline figure indicates. The overall outlook remains cautious. The construction sector continues to contract; exports continue to suffer under the sovereign debt crisis as the monetary union accounts for about half of the UK’s exports; and the government is still struggling with its heavy debt-load.

On a sector level, Morningstar equity analysts have an optimistic outlook for the dividends of most European healthcare companies as they currently offer secure and relatively high yields of close to 4%. While patent losses are expected to weigh on these firms’ income in the near-term, our equity analysts expect the industry to weather the worst of the “patent cliff” with secure cash flows which should continue to support strong dividend payouts.

In addition, the reference index is heavily biased towards financials which represent almost 40% of the index’s value. Of this portion, only about 6% is comprised of financial companies from either the UK or the Eurozone—those most vulnerable to the eurozone sovereign debt crisis. Moreover, less than 10% of the index’s value is represented by banks whereas the remaining financial companies are real estate, insurance and financial services firms. Nevertheless, as the global financial market is still quite interconnected, the index’s high allocation to financials could be reason for concern. Real estate markets around the globe are still struggling under a soft recovery and insurance companies are suffering from a low yield environment.

Indexkonstruktion

The STOXX Global Select Dividend 100 Index provides exposure to Global equities. The number of index constituents is fixed and includes the 100 highest dividend paying stocks in America, Europe and Asia/Pacific relative to their home market. Stocks are screened by historical non-negative dividend-per-share rates and dividend to earnings-per-share ratios. The constituents are weighted by their indicated annual net dividend yield and not market capitalisation. Therefore, one will find smaller companies in the index then normally expect in a broad based global index. The component stocks are capped at 15% of the index’s value and reviewed annually in March. As of writing, the heaviest country exposure is the US (25% of the index’s value), followed by the UK (16%) and Singapore (10%). The index is heavily biased to financials which represent 39% of its value, followed by utilities (18%) and telecommunications (14%).

Fondskonstruktion

Funded The db x-trackers STOXX Global Select Dividend ETF uses swap-based replication to track the STOXX Global Select Dividend TR Index. The ETF enters into a funded swap with Deutsche Bank to receive the index return. The fund transfers cash from investors to Deutsche bank which in turn posts collateral in a segregated account in the name of Deutsche Bank and pledged in favour of the fund. The collateral backing the swap is held by third-party custodian State Street, which also monitors the counterparty exposure for each db x-trackers ETF. The collateral basket consists of shares of European, American and Asian blue chip companies. Collateral levels are initially set at 105-120% of the fund's NAV. UCITS stipulates that derivative instruments from any single counterparty cannot represent more than 10% of the fund's net asset value (NAV), but in practice, the fund effectively retains zero counterparty exposure given the aforementioned level of over-collateralisation. db x-trackers does not engage in securities lending. The ETF does distribute dividends to investors.

Gebühren

The fund levies a total expense ratio of 0.50%. This falls in the middle of the range for ETFs tracking global equities. However, investors will incur additional costs on top of the published TER, e.g. bid-ask spreads, swap fees and brokerage fees when buying or selling ETFs.

Alternativen

As of writing, there are is not shortage of ETFs providing global equity exposure. The largest ETF in terms of total assets under management is the iShares MSCI World ETF, which uses optimised physical replication. The index is a market capitalisation weighted index representing 24 developed countries. The MSCI World is comprised of around 1600 stocks, heavily overweighting US equities (53% of the index’s value), followed by the UK (10%) and Japan (8%) On a sector level, financials are the biggest exposure representing about 20% of the index. This alternative is most suitable for investors with a stronger view on the US economy and a less bullish view on the UK compared to the ETF discussed here.

However, income-seeking investors will only find two alternatives. The largest in terms of AUM is the iShares STOXX Global Select Dividend 100 (DE) ETF, using full replication and charging a TER of 0.41%. In addition, ETF Securities offers the swap-based ETFX Dow Jones Global Dividend Fund. The index is far less biased towards the US (14%), while Australia (17%) represents the largest share of the index. However, investors should keep in mind that with €14 million in AUM this ETF is only about 5% the size of the db x-trackers STOXX Global Select Dividend 100.