ETF WDIV: the portfolio completely recalibrated, problems remain

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The SPDR S&P Global Dividend ETF (NYSEARCA:WDIV) first caught my attention about a year ago when I posted a neutral note.

I have concluded that the Global Dividend Aristocrats ETF has an attractive risk dispersion and a attractive standardized yield (about 4% at the time), but the lowered bar for dividend growth (10 straight years, with reserves versus 25 straight years in the case of the S&P 500 aristocrats) makes his portfolio less resilient to recession. I also pointed to its modest exposure to emerging markets as an advantage.

Today I would like to provide a detailed update for two reasons. First, WDIV’s underlying index was reviewed in July 2021, then it was rebalanced earlier this year, in January. In addition, the constituents of its benchmark, the S&P Global Dividend Aristocrats Index, are subject to a monthly dividend review in accordance with page 9 of the methodology. Therefore, it is more likely that his basket of stocks should be different now, which deserves a thorough discussion.

Second, with the issue of interest rates in the mix, global markets are rocked by bouts of declines, which once again underlines the importance of allocation to value plays that do not have premiums. excessive growth that are currently being sprayed. With a focus on high yield and dividend growth, WDIV might be one of the value-oriented ETFs to consider. However, his strategy has drawbacks. More on this below in the article.

Portfolio changes and likely reasons behind the moves

In short, WDIV is designed to follow the cohort of relatively high-yielding global aristocrats (including the US) or companies with at least ten years of DPS increase (there are caveats when the DPS is allowed to remain at least stable) from the S&P World BMI. Small caps with a float-adjusted market value of less than $1 billion cannot join the index. While both developed and emerging market equities are welcome, the index and fund are rich in North American equities, with the US and Canada together accounting for 41% of net assets. This has hardly changed since my May 2021 rating.

In short, a seemingly solid strategy, but not without drawbacks. First, as I have stressed many times before, international exposure to the surging US dollar is precarious. This is certainly not entirely true for the Canadian dollar which has been supported this year by soaring oil prices. However, for the yen and the euro, the other key currencies to which the fund is exposed (for example, Japanese equities have a weighting of around 11.6%), 2022 has been completely lackluster. I warned of a rough ride ahead for the yen given Tokyo’s commitment to ultra-loose monetary policy in my article on the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO) earlier this year. It is not clear if the currency has already bottomed out.

Since May 4, 2022, WDIV was 97 shares longwhile only 64 of them were in the stock basket as of May 2021.

Another way of saying, 32 stocks were removed for different reasons, including a dividend cut or a failed high yield test.

Below, I will briefly assess a few key positions that have been eliminated.

  • Exxon Mobil (XOM) is among the top missing stocks. As of May 2021, this was the fund’s largest holding with a weighting of nearly 2%. XOM is a solid dividend payer as its status as the S&P 500 dividend aristocrat was confirmed with another DPS hike last year. It therefore remains among the holdings of the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). The likely culprit for its removal is capital appreciation which has resulted in the compression of the dividend yield. I should also note that there is no doubt that the absence of this heavyweight probably cost the fund a few basis points of return or more, as the stock has seen a tear this year, gaining around 44%, in the middle the surge in Brent prices, with the rebound relaunched by supply/demand imbalances on the energy market.
  • AT&T (T) lost its status as an S&P 500 dividend aristocrat and was later removed from NOBL and WDIV. I would say that the sale of T shares was more of a tailwind for the fund’s performance as T has fallen dramatically this year, with a year-to-date price return of around (21.2)%
  • People’s United Financial Inc. (traded with a PBCT ticker) is also no longer a WDIV holding since it was acquired by M&T Bank (MTB) earlier this year. PBCT was also removed from the NOBL portfolio.
  • National Health Investors (NHI) lost its place in the basket, likely due to the significant dividend cut announced in June 2021. This healthcare REIT had a weighting of around 1.2%.
  • Toronto-listed mid-tier player Pembina Pipeline (PBA) was the 6th largest in the fund a year ago, with a weighting of around 1.8%.
  • Eight Tokyo-listed companies were squeezed out, including Japan Tobacco (OTCPK:JAPAF), Hengan International Group (OTCPK:HEGIF), Sekisui House (OTCPK:SKHSY) and Yokohama Rubber (OTCPK:YORUF), etc. Note that Japan is still in the top three countries to which the fund is most exposed, with a weighting close to last year’s level, ~11.6%.

At the same time, 33 titles were added; they currently represent ~31% of the portfolio. Here are the most notable additions,

  • LyondellBasell Industries (LYB), a large-cap chemicals player, with a forward yield of around 4.1%.
  • Rubis (OTCPK:RBSFY), a French gas company, with a forward yield of around 7.6%.
  • Tokyo-listed Takeda Pharmaceutical (TAK) yielded around 4.7%.
  • Telenor (OTCPK: TELNF), a telecommunications company based in Fornebu, Norway; its dividend yield is slightly north of 7%.
  • ~5.3% giving Verizon (VZ), an American telecommunications juggernaut, also managed to qualify for inclusion.

Returns he delivered this year

Over the period from May 2021 to April 2022, WDIV generated a total return of around (0.8)%, significantly lower than the iShares Core S&P 500 ETF (IVV), as well as NOBL and its FCF-focused counterpart Pacer Global Cash Cows Dividend ETF (GCOW); I wrote a bullish rating on GCOW in February.

Returns WDIV vs IVV vs GCOW vs NOBL

Created by author using data from Portfolio Visualizer

I believe the FX factor was one of the culprits.

Returns Table

Looking for Alpha

Its performance has been rather lackluster since the start of the year, although it has certainly done better than the high-growth IVV and, surprisingly, even better than NOBL, but GCOW is the clear winner.

Final Thoughts

WDIV is a roughly $286 million fund with an expense ratio of 40 basis points, which seems adequate for the international equity basket. Although it has been heavily recalibrated since May 2021, it remains heavy in US, Canadian and Japanese equities, and financials remains its main sector with a weighting of around 23.7%.

There are several reasons why I think WDIV is not a buy.

  • First, its net asset value is vulnerable to further appreciation of the US dollar amid long overdue interest rate hikes designed to keep inflation in check and (hopefully) not suppress economic growth. Its currency exposure has already generated below-average one-year returns and may continue to weigh on its performance going forward. Admittedly, this is less of a problem over longer periods, say ten years, when the current hawkish period is over, but it is impossible to predict how developed country currencies will perform against the generously valued USD in a relatively distant future. For now, the dollar’s short-term picture is bright. Of course, I would welcome any contrary point in the comments section.
  • Second, the main red flag is the dividend profile as a whole, as the fund has a D+ rating, with lackluster growth (or outright contraction) among contributors to the poor rating.

WDIV Dividend level

Looking for Alpha

All in all, WDIV is just a Hold.

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