San Diego-based Reality Shares Advisors, LLC, a new player in the exchange traded funds business, recently launched its first product that offers retail investors a unique investment option; eliminate the noise from dividend investing.
Founded by Smith and Barney and Morgan Stanley veteran Eric Ervin and his colleagues in 2012, the firm took two and a half years to launch its first product. The Reality Shares DIVS ETF (DIVY) uses derivative instruments to strip out stock price gyrations while capturing dividend growth.
To be sure, DIVY uses a strategy that has been used by institutional investors using structured products for a long time, mostly for their high net-worth clients. But such a strategy is being offered for the first time to retail investors in an ETF wrapper.
True, dividends for many investors are and will always remain about regular income. But DIVY doesn’t look to produce income. Compared to traditional dividend ETFs that tend to hold stocks with the longest history of dividend hikes such as Coca-Cola and Procter & Gamble, DIVY uses a quantitative and rules-based strategy to eliminate noise.
The actively-managed fund uses financial derivative instruments including futures, forward contracts, index options and dividend swaps. It may also buy other ETFs that track large-cap security indexes. Since it focuses on S&P 500 and NASDAQ stocks whose payouts are increasing fast, the new fund effectively purges single-stock risks as payouts historically have shown much less volatility than stock prices.
Prices of index-option contracts change continually to reflect the changes in expected dividend payouts. DIVY may build a pool of such contracts in its portfolio to reflect the expected dividend values, thus eliminating volatilities of the underlying large-cap stocks. Such strategies are common among professional traders, particularly in the over-the-counter (OTC) derivative markets.
The fund has an annual expense ratio of 0.85 percent.
Disclosure: No holdings
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