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Dividend and income investments with UBS ETFs
A consistent cash flow can be accessed through equity as well as fixed income. Our ETFs for yield-oriented investors enable access to higher-than-average yielding stocks and investment grade corporate bond yields, as well as currency hedged income. With UBS ETFs you can gain exposure to the top 100 dividend-paying companies from around the globe, pursue implicit dividend strategies by investing in value stocks or by timing dividends through the rotation of your exposure between cyclical and defensive sectors and find the optimal balance between attractive yield and credit quality in the corporate fixed-income space.
Sovereign bonds delivered higher yields than equity dividends from the 1970s until the mid-2000s. However, this has changed recently due to low inflation levels and record low interest rates in many developed economies. Figure 1 shows the historical dividend yields across developed economies, and the yields on default-free bonds (US treasuries with long and short maturities). Currently investors face similar low-yield environments in both traditional asset classes. This implies that yield from traditional assets and traditional benchmarks does not meet the investment objectives of income-oriented investors. Within equity, this concern can be addressed with a dividend-oriented strategy. In the bond universe investors need to look beyond sovereign debt in order to increase the yield potential in their portfolio.
Figure 1: Yields across assets (USD, 5Y averages)
The importance of dividends for equity investors cannot be stressed enough. Historically, dividend contributions to total return (which includes capital appreciation, cash dividends and share buybacks) amounted to between 1 and 4 percent annually. Figure 2 shows the power of dividend accumulation in the long-run, sourced from a dividend-oriented strategy, compared to a traditional benchmark. The 100 USD investment in January 1999 in the dividend-oriented Dow Jones Global Select Dividend would amount to 577 USD by mid 2014, as compared to a 235 USD return from the standard benchmark Dow Jones Global. The lower figure, with trailing drawdowns, demonstrates that the market risk profile of a dividend strategy moves in parallel to the broad market, showing better downside protection in early 2000s.
Figure 2: The importance of dividends
UBS Asset Management offers investors an ideal way to gain direct exposure to global high yielding equities: the UBS ETF (IE) DJ Global Select Dividend UCITS ETF. This ETF invests in the top 100 dividend-yielding companies in developed equity markets around the globe.
In order to be eligible for the index, companies have to have favourable dividend profiles and pass several dividend-related screening criteria. For example, dividend growth must not be negative, and all dividend payments have to be comfortably covered by the company’s earnings.
Investing in value stocks is an indirect way to pick up higher-than-average dividends from the benchmark. Value stocks are characterized by low price-to-book and price-earnings ratios as well as high dividend yields. In contrast, growth stocks are assumed to have strong capital appreciation potential, and these stocks pay little or no dividends, as earnings are retained for future company expansion.
UBS Asset Management offers Exchange Traded Funds replicating the MSCI USA Value and MSCI EMU Value.
Another indirect way to gain exposure to higher-than-average yielding equities is to invest in those sectors of the stock market which have a link to the current business cycle. Cyclical sectors move in parallel to the business cycle and tend to outperform the broad market in positive economic times. In contrast, defensive sectors tend to behave stable in more turbulent times, and pay higher-than-broad-market dividends in stressed times. With these two offerings, investors can time capital appreciation and dividends along the business cycle movements.
Record low interest rates in many developed countries are a double-edged sword for investors. On the one hand they have profited from the compression of yields over the last years through high total returns in many sectors of the global bond universe. On the other hand it grows increasingly difficult to find attractive yields nowadays. Under these circumstances, it is vital for investors to strike the right balance between risk and return: Prime grade 'default-free' government bonds such as US treasuries and German Bunds offer minimal yields, whereas seemingly attractive alternatives, such as high yield corporate bonds, might not provide enough compensation for the risk taken by the investor.
This particularly applies for high yield bonds with credit ratings below BB. These bond valuations would likely come under significant pressure, should the benign credit conditions and low default rates we currently see be replaced by a harsher environment. During credit-stressed periods, the valuation of low quality credit declines sharply, such that the average price return can be negative, and even when offset by a higher coupon return, the total return can be lower than the total return from investment grade bonds (see Figure 3).
Figure 3: Return decomposition across US corporate ratings
UBS Asset Management offers investors a wide range of Exchange Traded Funds which track major corporate bond benchmark indices defined by high credit quality. They provide investors with benchmark exposure to the most important corporate fixed income markets in Europe and the USA. For investors who want to access the US bond market without incurring foreign exchange risk, share classes hedged to EUR and the CHF are available.
UBS ETFs invest in various asset classes
For example, equities, bonds, commodities, precious metals, hedge funds and real estate, and may therefore be subject to high fluctuations in value. An investment in these funds is therefore only suitable for investors with an investment horizon of at least five years and a corresponding risk tolerance/capacity.
Every fund has specific risks that may increase sharply in unusual market conditions. The net asset value of the fund therefore depends directly on the performance of the underlying index.
Losses are not offset. For more information about the risks, please see the prospectus and Key Investor Information Documents (KIIDs).
If the currency of a financial product or financial service is not the same as your reference currency then the performance may increase or decrease due to currency fluctuations.
Risks of restricted or increased liquidity in the fund (liquidity risk)
There are risks that may negatively impact the liquidity of the fund. This may result in the fund temporarily or permanently being unable to meet its payment obligations or it temporarily or permanently being unable to fulfill redemption requests from investors. It may occur that the investors would not be able to hold the instrument for the planned holding period and the invested capital or parts thereof may be unavailable indefinitely. If liquidity risks are realized, it may also occur that the net asset value of the fund, and therefore also the unit value, would fall, for example if the company is forced, where legally permissible, to sell assets for the fund at below the market value.
Counterparty risk including credit/receivables risk
There are risks that may arise for the fund as part of a contractual relationship with another party (so-called counterparty). In this respect there is a risk that the contractual party may no longer be able to fulfill its obligations under the contract. These risks may negatively impact the performance of the fund and are therefore detrimental to the unit value and the capital invested by the investor. If the investor sells units in the fund at a time when a counterparty or central clearing counterparty has defaulted and therefore the value of the fund has been negatively impacted, it is possible that the investor may not receive all or any of the money he/she has invested in the fund. As such, the investor could lose some or even all of the capital invested in the fund.
Operational and other risks for the fund
Operational risks refer to risks that may, for example, arise as a result of insufficient internal processes as well as human or system errors at the company or external third parties. In particular, this includes risks resulting from criminal acts, misuse or natural disasters, legal or political risks, changes to tax conditions or custody risks. These risks may negatively impact the performance of the fund and are therefore detrimental to the unit value and the capital invested by the investor. If an investor sells units in the fund at a time when the prices of the assets contained in the fund are lower than when they were acquired, he/she may not receive all or any of the money he/she has invested in the fund. As such, the investor could lose some or even all of the capital invested in the fund.
These risks are not exhaustive. Investments in a product should be made only after careful study of the current prospectus and Key Investor Information Document (KIID). The distribution of this information is permitted only under the conditions provided by applicable law.