Lyxor UCITS ETF SG Global Quality Income NTR D-USD

Because this fund’s benchmark index weights constituents equally rather than by market capitalisation, investors will not necessarily find the largest and best known global companies among its top holdings. Additionally, the index contains smaller companies than one might normally expect in a broad based global market cap-weighted index. 

This fund pays dividends on a semi-annual basis with a current yield of 3.0% (compared to the S&P 500 index’s current yield of 1.15%), so it may be suitable for investors seeking income.

Fundamentale Analyse

This ETF is part of a growing cohort of strategic beta funds that eschew market capitalisation in favour of alternative weighting methodologies.

While many investors chase capital gains, historically much of the total return from equities has come in the form of dividends. Depending on the market, dividends have historically accounted for 40% to 60% of the returns from investing in stocks. A policy of regularly paying out earnings can discipline corporate management and reduce the chance of unprofitable acquisitions.

Historically, dividend-yielding value stocks, have offered better risk-adjusted returns than their growth counterparts, but they can remain out of favour for years. An issue for dividend-paying stocks at the moment is a potential increase in interest rates. Dividend-paying stocks tend to outperform in stable or declining-rate environments but struggle when rates are on an upswing. When rates rise, a company's cash flow must be discounted at a higher rate. All stocks are affected, but if the economy is booming, stable dividend-paying stocks will not generate as much investor demand as riskier stocks from cyclical and speculative sectors. When rates rise because the economy is growing at a healthy clip, defensive-sector stocks in particular become an expensive trade.

In the current low yield environment, dividend-focused ETFs provide an alternative way to access various sectors with steady income. In particular, the utilities sector--representing 30-35% of the index’s value-- has historically produced strong, stable cash flows and dividends.

Bond yields in some key economies like the US and UK, however, are trending upwards, signalling the beginning of a potential normalisation of valuations across asset prices. When the world's largest developed economies fully recover and central bankers start to raise interest rates, bond yields will rise much further over time, making dividend funds like this one less appealing to income investors.

Indexkonstruktion

The SG Global Quality Income Index comprises 25 to 75 equally weighted stocks from a universe of stocks listed in North America, Europe and Asia-Pacific. The stocks cannot be financial companies and must have a free float-adjusted market capitalisation above $3 billion. From the eligible universe, to be included in the index, a security must fulfil three conditions. First, it must have a quality score (defined as the sum of 9 criteria based on profitability, leverage and operating efficiency of the issuer) of 7 or higher on the Pitroski scale of 9 quality factors. Second, its balance sheet risk score, measured by calculating a distance to default measure, must rank within the top 40% of the universe. Third, it must have an adjusted dividend yield greater than the highest value of either 4% or 125% of the market cap-weighted dividend yield of the universe. The index is rebalanced on a quarterly basis. Geographically, the US is the most represented country in the index, with a 22-27% weighting, followed by United Kingdom (20-25%), Australia (17-22%) and Canada (10-15%). Top sectors are utilities (30-35%), telecommunications (15-20%), and consumer discretionary (14-19%). The index is not very heavily concentrated at the stock level, with the top 10 names accounting for 15-20% of the total weighting. As of this writing, the top positions are Scana, Westar Energy, and ConEd, all with weightings of 1-2%.

Fondskonstruktion

The fund uses synthetic replication to provide exposure to the underlying benchmark, entering an unfunded swap transaction with parent bank Societe Generale. The fund uses investors’ cash to buy a substitute basket of securities, the performance of which is exchanged for the performance of the index. Lyxor provides full transparency on the components of the substitute basket, which is made up of liquid stocks from OECD countries. The fund aims to maintain zero counterparty exposure by reviewing the marked-to-market value of the swap on a daily basis and resetting whenever its value becomes positive, i.e. when the counterparty owes money to the fund. At the time of writing, the substitute basket was valued at 102.24% of the net asset value of the fund. The fund’s holdings, which are monitored daily by Lyxor’s asset manager, are held in a segregated account at Lyxor’s custodian, Societe Generale Security Services. Under the terms of the swap, the counterparty agrees to provide the fund with exposure to the total return of the underlying index, net of any associated taxes, costs or fees. The fund does not engage in securities lending.

Gebühren

The fund’s total expense ratio (TER) is 0.45%, which is in line with other ETFs offering similar exposure but high relative to standard market-cap weighted ETFs providing exposure to global developed market equities. The range for the tracking difference (-0.50 to -0.04) since 2011 suggests that annual holding costs may vary significantly from year to year. Additional costs to investors associated with trading the ETF include bid-ask spreads and brokerage fees.

Alternativen

There are only a few alternative ETFs providing exposure to global dividend stocks. db X-trackers and iShares both offer funds tracking the STOXX Global Select Dividend 100 Index which includes significant exposure to financial services companies. The db X-trackers fund uses synthetic replication and charges a TER of 0.50% whereas the iShares fund uses full replication and charges a TER of 0.46%.

However, there is no shortage of ETFs providing standard market capitalisation weighted global equity exposure, though investors in these funds would not enjoy the potential benefits of a dividend-enhanced strategy.