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Dividend focused ETFs

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ETF ANALYSIS

Suitability: CoreShares DiviTrax is a dividend focused ETF. It will suit investors looking for quarterly cash payments while maintaining the prospect of steady growth in capital. While bond ETFs can also be used to provide regular income, capital appreciation prospects are not as high as that offered by the equity ETFs.  

What it does: The ETF tracks the S&P South Africa Dividend Aristocrats index which is made up of JSE-listed companies that have followed a policy of increasing or maintaining stable dividends for five consecutive years. The S&P South Africa Dividend Aristocrats index is limited to companies in the S&P South Africa Composite index – a market capitalisation index composed of companies with market values of $100m or more.  The fund selects its investments based on actual dividends rather than dividend yields.

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Advantages

  • The fund focuses on income-generating stocks, providing income for investors
  • It has low concentration risk, with the biggest asset representing only 2.7% of the fund
  • Theoretically it has potential to outperform other income-focused alternatives such as ETFs investing in bonds or preference shares

Disadvantages

  • The fund is dominated mostly by mature companies which might have limited price upside potential

Top holdings: The fund is well distributed across its 45 constituents with the highest exposure to one stock (SABMiller) being only 2.7%.

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Risk: Building a portfolio on the basis of a company’s dividend-paying history is likely to result in higher return variability as the constituents might have to be changed from time to time. Dividend policies, particularly those for mid- and small-cap companies which are still growing, are likely to change frequently depending on availability of growth opportunities.  Even for larger companies, changing economic conditions may see some suspending or lowering dividend payments to preserve cash. Such events will be followed by a reconstitution of the fund, which will affect its returns.

Fees: The total expense ratio is 0.39%. The costs consist primarily of management fees and additional expenses such as trading fees and other operating expenses.

 

 

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Historical performance: The performance of an investment in any ETF depends on the method used to invest. A lump-sum investment will mimic the ETF performance exactly. However, investing through regular instalments will result in an annualised return in your portfolio which is different to that of the ETF fund. The return in your portfolio will depend on the timing of your instalments.  CoreShares DivTrax has been one of the best-performing ETFs since inception, though it has an above average tracking error.

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Fundamental view: The fund holds a diverse range of quality companies. The ability to pay dividends is usually read as an indicator of confidence in the future of a company, as management is willing to disburse cash rather than hold on to it as a safety net for possible risks. It also usually indicates a company with strong financial management that is able to generate and look after its cash position. These factors make high dividend stocks popular not just for their income characteristics but also for strong financial performance.

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Alternatives: A close peer is the Satrix DIVI which is also constructed based on dividends that a company pays. It has a dividend yield of 4%. Its tracks the FTSE\JSE DIVI PLUS with a TER of about 0.42%.

BACKGROUND: Exchange traded funds (ETFs)

Exchange Traded Funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to more than one company in a single transaction. ETFs can be traded through your broker the same way as shares, say, on the Easy Equities platform. In addition, it qualifies for the tax-free savings account, where both capital and income gains accumulate tax free.

Benefits of ETFs

  • Gain instant exposure to various underlying shares in one transaction
  • They diversify risk because a single ETF holds various shares
  • They are cost-effective
  • They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
  • High transparency through daily published index constituents

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