KBWD: 10% Yield Has A Catch (NASDAQ:KBWD)

The Invesco KBW Excessive Dividend Yield Monetary ETF (NASDAQ:KBWD) present publicity to small-cap monetary corporations and REITs. The ETF pays a pretty 10.0% trailing 12 month distribution yield, however I’m involved that its yield is greater than its common annual returns. It additionally pays an especially excessive whole expense ratio of three.84%, inclusive of acquired charges. I believe whole return traders could also be higher off with vanilla sector ETFs.

Fund Overview

The Invesco KBW Excessive Dividend Yield Monetary ETF offers publicity to monetary corporations that pay a excessive dividend yield. The KBWD ETF tracks the KBW Nasdaq Monetary Sector Dividend Yield Index (“Index”), an index designed to trace monetary companies corporations, together with REITs, that pay excessive dividend yields.

The KBWD fund has $390 million in belongings.

Portfolio Holdings

Determine 1 reveals the portfolio holdings of the KBWD ETF. As designed, KBWD has a 43.3% allocation in Residential & Industrial REITs, 29.3% in Funding Banking companies, and 15.4% allocation in Banking Companies. In whole, the fund has 57% of belongings invested in monetary companies and 43% in REITs.

The fund skews to small-cap worth shares, with a median market cap measurement of the fund’s holdings of $1.75 billion and a 9.8x trailing P/E ratio.

Determine 3 reveals KBWD’s prime 10 holdings, which comprise 38.3% of the portfolio.

Returns

Determine 4 reveals KBWD’s historic returns. KBWD had a unbelievable January, returning 15.8%. Nonetheless, longer-term returns have been mediocre, with 3/5/10Yr common annual whole returns of 1.2%/3.5%/5.2% respectively to January 31, 2023.

Rollercoaster Returns

KBWD on an annual foundation, one is struck by the acute annual volatility of returns. Prior to now 5 years, the KBWD fund misplaced 8.8% in 2018, gained 20.6% in 2019, misplaced 15.2% in 2020, gained 31.9% in 2021, and misplaced 19.0% in 2022 (Determine 5)

KBWD’s unstable annual returns present up in elevated portfolio volatility, with 3Yr volatility of 38.4% and 5Yr volatility of 31.4%. This interprets into low Sharpe Ratios of 0.23 on 3Yr and 0.25 on a 5Yr foundation for the ETF (Determine 6).

Determine 6 additionally reveals that the KBWD ETF has considerably greater volatility and decrease returns than the Morningstar class Monetary Index.

Distribution & Yield

KBWD’s most important promoting level is its excessive month-to-month distribution, with a trailing 12-month distribution fee of $1.69/share which interprets into a ten.0% trailing yield (Determine 7).

Nonetheless, traders ought to be aware that with the fund paying a ten.0% yield however solely incomes a 5Yr common annual whole return of three.5%, the fund might have a (return – distribution) shortfall.

Charges

The KBWD ETF fees a comparatively small 0.35% administration payment. Nonetheless, most of the fund’s holdings additionally cost administration charges (REITs and monetary companies corporations), so the all-in whole expense ratio is an eye-watering 3.84% (Determine 8).

KBWD vs. IYR and XLF

Because the KBWD ETF is predominantly invested in REITs and monetary corporations, it may be useful to match its historic efficiency to the iShares US Actual Property ETF (IYR) and the Monetary Choose Sector SPDR ETF (XLF). Determine 9 and 10 compares the funds utilizing the time interval January 2011 (KBWD’s inception) to January 2023.

First, as anticipated, KBWD is very correlated to IYR and XLF, exhibiting correlations of month-to-month returns of 0.72 and 0.81 to IYR and XLF respectively (Determine 9).

Shifting on to efficiency, the KBWD ETF has a CAGR return of 6.2% vs. IYR at 7.9% and XLF at 11.0% within the time interval analyzed (Determine 10). KBWD additionally has a markedly greater volatility of twenty-two.1% vs. 16.6% and 19.0% respectively. This interprets right into a far decrease Sharpe Ratio of solely 0.37 vs. 0.50 and 0.61 for IYR and XLF.

The one space the place KBWD is measurably higher than IYR and XLF is its distribution yield, the place KBWD is paying a ten.0% trailing yield vs. 2.7% for IYR and 1.9% for XLF (Determine 11).

Nonetheless, I really feel KBWD’s excessive headline distribution yield is a little bit of a mirage, because the fund clearly earns much less in common annual whole returns than its distribution yield. Because of this whereas shareholders obtain a excessive yield up-front, they pay for it by NAV declines within the back-end (such that whole returns are lower than the yield).

Conclusion

Whereas the KBWD ETF pays a pretty 10.0% trailing 12-month distribution yield, I’m involved that it seems to be paying out a better distribution yield than its common annual returns. It additionally fees a excessive whole expense ratio of three.84%, inclusive of acquired charges. Lastly, though it correlates with the IYR and XLF ETFs, the KBWD lags considerably behind each vanilla ETFs whereas having greater volatility.