SYLD: Strong Shareholder Yield ETF, Solid Strategy And Performance, 2.3% Yield (BATS:SYLD)

The Cambria Shareholder Yield ETF (BATS:SYLD) is a U.S. equity ETF, focusing on companies with above-average shareholder yields. In practice, and under current market conditions, SYLD is a diversified mid-cap value ETF, focusing on medium-sized companies with cheap valuations. The fund has outperformed most of its peers and the S&P 500 since inception, a solid combination.

SYLD’s diversified holdings, cheap valuation, and reasonably strong performance track-record, make the fund a buy. SYLD only yields 2.3%, and so the fund is not an effective income vehicle.

SYLD – Basics

• Investment Manager: Cambria Funds
• Expense Ratio: 0.59%
• Dividend Yield: 2.30%
• Total Returns CAGR Inception: 14.90%

SYLD – Overview

SYLD is a U.S. equity index ETF. Although the fund is actively-managed, it follows an explicit, detailed investment methodology, and so effectively functions as an index / smart beta fund. As mentioned previously, SYLD invests in companies with above-average yields and buybacks, but also considers broader valuation, quality, and momentum metrics. The fund’s investment methodology is as follows.

As can be seen above, SYLD’s investment methodology is quite thorough and deep, but surprisingly simple. The fund simply invests in U.S. equities considering a slew of fundamental metrics, centered on yields and buybacks.

SYLD’s investment thesis is quite simple, and centers on the fund’s:

• Diversified holdings, providing exposure to a hundred equities from all relevant industry segments
• Cheap valuation, which could lead to strong, market-beating returns
• Comparatively strong performance, with the fund outperforming relative to its peers and the S&P 500 since inception

The above combine to create a strong fund and investment opportunity. Let’s have a look at these three points.

Diversified Holdings

SYLD’s investment managers consider broader portfolio diversification when selecting companies for inclusion, which results in a reasonably well-diversified fund. SYLD invests in exactly 100 companies, a reasonably good amount, albeit lower than that of most broad-based U.S. equity indexes, including the S&P 500. Concentration is quite low as well, with the fund’s top ten holdings accounting for under 20% of its value.

As can be seen above, SYLD focuses on medium-sized companies, with a weighted average market-cap of $67 billion. The fund also specifically excludes or underweights several mega-cap tech stocks. Although these are not particularly small companies, they are quite a bit smaller than the market average. As an example, the S&P 500 has a weighted average market-cap of $593 billion, almost ten times greater. SYLD’s comparatively small holdings are somewhat riskier than average, as smaller companies are generally less diversified, and less resilient than their larger peers.

SYLD provides investors with exposure to most relevant industry segments too. As with most funds with a value tilt, SYLD is overweight financials, materials, and energy, while being underweight tech, due to differing industry valuations.

SYLD’s reasonably well-diversified holdings reduce portfolio risk and volatility, and are a benefit for the fund and its shareholders.

Cheap Valuation

SYLD’s investment methodology takes into consideration several fundamental metrics when selecting companies for portfolio inclusion, but valuation metrics, including dividend and buyback yields, are key. SYLD’s underlying holdings are therefore very cheaply valued, and the fund’s valuation metrics compare favorably to those of the S&P 500.

From the above, cash-flow metrics look particularly attractive, with the fund boasting a 9.0x price to free cash flow ratio. SYLD’s underlying holdings could distribute +11.0% in dividends per year to shareholders and fund their growth CAPEX at the same time. SYLD’s underlying holdings generate tons of revenues, earnings, and cash flows, and are cheaply valued to boot, a solid combination.

SYLD’s cheap valuation has two significant benefits.

First, cheap valuations mean strong potential returns, contingent on valuations normalizing. Valuations have normalized for the past six months or so, during which SYLD has outperformed, as expected.

SYLD remains competitively valued relative to the S&P 500, so further gains seem likely. On a more negative note, these potential gains are dependent on fickle market sentiment, and so are somewhat speculative, and very uncertain. Valuation gaps can persist for years, even decades. Markets can remain irrational longer than you can remain solvent, and that is the case for SYLD too.

SYLD’s focus on companies with above-average yields and buybacks helps in this regard. Share prices and capital gains are dependent on market sentiment. Dividends and buybacks are not, and the fund’s underlying holdings generate more than sufficient cash to fully fund generous dividends and buybacks. SYLD does focus on companies with above-average yields and buybacks, although, in practice, both of these seem quite close to the market average. As an example, SYLD yields 2.3%, while the S&P 500 yields 1.4%. SYLD’s yield is higher, but not by a lot. In any case, the fund’s focus on companies with strong shareholder yields does make the fund’s returns less dependent on investor sentiment. Which brings me to my next point.

Second benefit, valuations also serve to somewhat reduce risk, for similar reasons as above. Cheaply valued stocks generate sufficient earnings and cash-flows to fund strong dividend payments and share buybacks. These can help buttress share prices during times of stress, ultimately reducing losses. SYLD’s underlying holdings can only drop so much in price before their management teams embark on an aggressive share repurchasing program, and they have the cash and inclination to do so. Growth stocks have much higher valuations and prices, and so can experience greater losses, and have a harder time leveraging their meager earnings to reduce these. We’ve seen this dynamic play out YTD, during which SYLD has suffered significantly fewer losses than average.

SYLD’s cheap valuation is a significant benefit for the fund and its shareholders, and the fund’s core investment thesis.

Comparatively Strong Performance

SYLD’s performance track-record is reasonably good, with the fund generally outperforming relative to its peers, including value, mid-cap, and mid-cap value indexes. The fund has very slightly outperformed the S&P 500 since inception, during which most value funds have underperformed. The fund’s performance has been particularly strong YTD, as valuations normalize. Extremely few value funds have matched, let alone surpassed, the performance of the S&P 500 during the past few years, but SYLD is one.

As an aside, SYLD has underperformed on the 1Y mark but, from what I’ve seen, this is mostly a timing issue: the fund’s share price spiked in early 2021, and so performance looks uncharacteristically weak on that starting point.

SYLD’s outperformance started in earnest during mid-2021, once investors shifted towards value stocks, and these started to outperform. Results are logical, and consistent with a strong, effective, value tilt or value strategy.

SYLD’s strong performance track-record is a significant benefit for the fund and its shareholders, and make SYLD a particularly attractive value fund relative to its peers.

Conclusion

SYLD’s diversified holdings, cheap valuation, and strong performance track-record, make the fund a buy.